Currency hedging for Canadian investors
No one knows with certainty the direction of the Canadian dollar. Hedging can contribute to an investor's absolute returns during periods when the Canadian dollar is rising. However, this strategy will detract from returns when the Canadian dollar falls.
How is currency hedging applied?
Let's assume a portfolio manager hedges USD$50,000 at the exchange rate of USD$1.00 to ensure CAD$50,000 will be received a year later.* Hedging this amount ensures the portfolio manager is guaranteed to receive CAD$50,000 at the end of the year, regardless of how much stronger or weaker the Canadian dollar is at that time.
Using this example, the diagram below explains what would happen to this investment at the end of the year if hedged, and not hedged based on the movement of the Canadian dollar over the year.
Four scenarios are presented with their results:
- If hedged and the Canadian dollar strengthens
- If hedged and the Canadian dollar weakens
- If not hedged and the Canadian dollar strengthens
- If not hedged and the Canadian dollar weakens
* to simplify this example, no other types of investment returns (i.e., capital gains, dividends, interest income, etc.) or costs of hedging have been included in the outcome.
Sun Life Global Investments' currency hedging approach
Investors can access our U.S. equity funds in both hedged and unhedged options. The hedged versions of our funds are ideal for investors who want exposure to U.S. equity investments, but want to minimize the negative impact of a rising Canadian dollar on their returns.