Tag Archives: greenback

Why Canadian Investors should Include U.S. Stocks in their Portfolios

U.S. stocks can provide Canadian investors with all the foreign exposure they need

I’ve been advising Canadian investors to include U.S. stocks in their portfolios for more than 30 years. I continue to recommend them today. The U.S. stock market offers the widest variety and highest investment grade of companies to invest in of any country in the world. It also offers a wider selection of growth opportunities for those companies to pursue, in North America and around the world.

For our portfolio management clients, our general preference is to invest one quarter to one third of their holdings in U.S. stocks and the remainder in Canadian stocks.

Many major financial institutions recommend investing in North America. Some also recommend investing outside North America, especially in developing nations. They say that countries outside North America also offer great opportunities, and they may be right in some cases. They note that foreign investing offers an additional chance for diversification. This may be true, but we see it as irrelevant. Our view is that North America offers all the diversification that you really need.

Many promoters of emerging-market investing are also motivated at least in part by a conflict of interest.

By offering imported investments in their home market, they can earn higher profit margins than they get with domestic investments alone. That is, they make more money by promoting foreign investments. Investors may not make any more money, but they undoubtedly face more risk.

We have occasionally offered favourable advice about a handful of high-quality foreign stocks in the past few decades, while mentioning the added risk. But we’ve stressed our view that the U.S. and Canadian markets provide all the investment opportunities that you need to succeed as an investor.

Of course, the Canadian market offers opportunities that beat those available in the U.S.: in bank stocks, in the Resources & Commodities sector, and in specialists like CAE Inc. But Canada has nothing to compare with, say, Alphabet, Microsoft, McDonald’s and any number of other household names.

Neither too hot nor too cold

Some investors say they agree with our view on U.S. stocks in principle, but they disagree with our timing. They think the U.S. dollar is just too high at present levels: too hot, you might say. These folks seem to think that the natural foreign exchange rate between the U.S. and Canadian dollars should be around parity.

As of late 2023, the U.S. dollar has traded at around one-third higher than the Canadian dollar. Way above parity! In fact, the U.S.-Canada exchange rate has not been anywhere near parity in the past decade.

The U.S. dollar has mostly stayed between $1.20 Cdn. and $1.46 Cdn. since the start of 2015. It’s now around the middle of that 8-year range.

Since 1971, the U.S. dollar has stayed between $0.94 Cdn. and $1.60 Cdn. It’s now around the middle of that 52-year range.

Timing is worth a look. But if you make it the deciding factor in your investment decisions, it’s apt to cost you money, in the long run if not in the short.

“Has-been” U.S. dollar has a long life ahead

A lot of foreign governments share the view that the U.S. dollar is overvalued.

In March 2023, in a meeting in New Delhi, the representative from Russia revealed that his country is spearheading the development of a new currency. It is to be used for cross-border trade by the BRICS countries: Brazil, Russia, India, China, and South Africa. (Potential recruits include Iran, Syria and North Korea.)

I put this ambition on a par with the claims of cryptocurrency promoters. Some of them still predict that cryptocurrencies will take the place of the U.S. dollar. Continue Reading…

Currency investing may seem appealing but you’ll lose in the long run

It’s A Rare Investor Who Makes Enough Profit From Long-Term Currency Investing Activities To Compensate For The Risk Involved

As a general rule, we advise against long-term currency investing speculation for many of the same reasons we advise against options trading and bond trading. It’s a rare investor who makes enough profit from these activities to compensate for the risk involved.

Our view is that if you like a currency’s outlook, you should buy stocks that will profit from a rise in that currency. Our longstanding advice is to invest mainly in well-established companies. Avoid exposure to currency trading, penny stocks, new issues, options, futures or any high-risk investments. That way, while you may experience modest losses when markets drop, you should show overall positive results over time.

Keep hedged ETFs as a long-term currency investing strategy out of your portfolio

If you want to buy U.S. stocks and hedge against currency movements, you could buy a hedged ETF.

Hedged ETFs, like, say, the iShares Core S&P 500 ETF (symbol XUS on Toronto) are funds sold in Canada that hold U.S. stocks. However, they are hedged against any movement of the U.S. dollar against the Canadian dollar. That means that the ETF’s Canadian-dollar value rises and falls solely with the movements of the stocks in the portfolio.

For example, if a stock rises 10% on, say, New York, but also rises a further 5% for Canadian investors due to an increase in the U.S. dollar, a holder of a hedged ETF would only see a 10% rise in the value of that holding in their hedged ETF. At the same time, the reverse is also true: If a stock rises 10% on New York, but falls 5% for Canadian investors due to a decrease in the U.S. dollar, a holder of a hedged ETF would still only see a 10% rise in the value of that holding as part of their hedged ETF.

Note, though, that hedged funds include extra fees to pay for the hedging contracts needed to factor out currency movements. Of course, those costs can rise or fall regardless of currency swings.

Hedging against changes in the U.S. dollar only works in your favour when the value of the U.S. dollar drops in relation to the Canadian currency. If the U.S. dollar rises while your investment is hedged, it reduces any gain you’d otherwise enjoy, or expands a loss. Continue Reading…

When and when not to hedge currency risk

depositphotos_16811249_s-2015-2By Tyler Mordy, Forstrong Global Asset Management

Special to the Financial Independence Hub

 An old Japanese proverb states “many a false step was made by standing still.”

So it is with currency exposures in investor portfolios. Consider the recent experience of Brazilian, Russian and even Canadian investors — to name a few countries with steeply depreciating exchange rates. By electing to remain invested in their domestic currency, they have all experienced a steep “loss” in their own global purchasing power (even if nominal values held up). An ostensibly conservative position has cost them dearly.

Welcome to the new, hyper-globalized world. Since the financial crisis, unorthodox policies — with central banks trying to outdo the effects of one another by plunging into a subterranean universe of quantitative easing and negative interest rates — have driven currency volatility much higher. Now, capital has a way of swiftly seeking out safe harbours and penalizing others who are not safeguarding their national currencies. Who would have thought the once-august Swiss franc would lose its safe haven status?

currency-chart-1-nov-2016

Indeed, currency exposures are having an outsized impact on portfolio returns. Currency-focused ETF vehicles could not have arrived at a better time, introducing yet another evolution in the portfolio management process.  Today, gaining global currency exposures is as easy as buying stocks.

Beyond the academic view

Continue Reading…

Time to repatriate US dollar gains back into loonie?

The Canadian dollar or loonie is under pressure amid weak oil prices and a strengthening U.S. currency. Today, the loonie dropped to 78.39 cents for a U.S dollar the lowest in a many years.
The Canadian dollar is under pressure amid weak oil prices and a strengthening U.S. currency.

My latest Financial Post blog is titled It might be time to repatriate your US$ investments and book those currency gains.

Actually, the C$ has strengthened of late, so the timing isn’t as opportune as a few weeks ago. After a long period of strength, the US$ has slightly weakened against various global currencies, even against the loonie.

Even so, we’re still a long way from par and it may make sense to book some of the gains, and if the loonie starts to sag further, repeat the process every time it falls 3 cents or so.

See also the following mid-January Hub blog by Adrian Mastracci: Falling Loonie Strategies.

Falling Loonie strategies

The Canadian dollar or loonie is under pressure amid weak oil prices and a strengthening U.S. currency. Today, the loonie dropped to 78.39 cents for a U.S dollar the lowest in a many years.By Adrian Mastracci, KCM Wealth

Special to the Financial Independence Hub

“Investors who have US cash and/or US portfolios are advised to revisit their currency strategies.

Canada’s Loonie has been falling to under 70 Cents against the US Dollar.
Recall it climbed from near 86 cents in mid-2009 to over parity.

Many market forces, such as currencies, are well beyond investor control.
Currency adds yet another potential hazard or reward to portfolios.

Of course, currencies are extremely hard to predict. They can also move very quickly in either direction.

Treat currency as an asset class

Treat currency as an investment with longer time horizons. Those with US cash and/or US portfolio may consider the merits, if any, of converting to Canadian Dollars.

It is important to get a handle on the Canadian tax cost of the US cash/portfolio before taking any action. It may also make good sense, depending on account values, to convert on more than one occasion.

Other considerations: Continue Reading…