Vanguard announced yesterday that they will open 6 Canadian-domiciled ETFs. Two of these ETFs cover indexes of U.S. and international stocks. Unfortunately, they also incorporate currency hedging back to Canadian dollars. This takes away the risk protection that I’m looking for, as I’ll explain.
Here are the 6 ETFs Vanguard announced:
– Vanguard MSCI Canada Index ETF
– Vanguard Canadian Aggregate Bond Index ETF
– Vanguard Canadian Short-Term Bond Index ETF
– Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged)
– Vanguard MSCI EAFE Index ETF (CAD-hedged)
– Vanguard MSCI Emerging Markets Index ETF
One of the risks we face as Canadians is that the Canadian economy will falter and fall behind the rest of the world. As a proud and confident Canadian, I don’t think this will happen. But when I think through the many possibilities, a faltering Canadian economy would cause us big financial trouble.
Imagine that at some point in the near future the world stops buying our oil and our economy takes a big hit. Government debt grows and we face 30% inflation for a decade. The Canadian dollar drops to 10 U.S. cents. All our imports cost 10 times what they used to cost when measured in Canadian dollars.
If I hold international stocks without currency hedging over this tough period, I get a 900% boost in returns (measured in Canadian dollars) to help me deal with expensive imports. If I use currency hedging, I get only a modest return on my international investments and can’t afford to buy imports.
The argument in favour of currency hedging is that Canada may do fine and some other countries may falter. However, this is what diversification is for. I can handle it if 5% of my holdings take a beating. What I can’t handle is having everything I own take a beating if Canada falters. I’m a proud Canadian, but I’d rather have my future depend on the world’s economy as a whole rather than just Canada’s.