After the loonie plummeted 2 cents to 81 cents US after yesterday’s surprise interest-rate cut, it seems an apt time to address a common misunderstanding about how the falling Canadian dollar affects US equity ETFs denominated in either country’s currency.

This was nicely tackled a year ago by Dan Bortolotti in his Canadian Couch Potato blog here.

Dan — who is both a consulting editor with MoneySense Magazine as well as an investment adviser with PWL Capital — had been chatting with me about the upcoming MoneySense ETF All-Stars feature in general and about the much-misunderstood topic of currency hedging in particular.

Personally, I believe international securities exposure provides diversification both for stocks or bonds but also currencies. I agree with Certified Financial Planner Fred Kirby (see Getting Help section)  that the first 20% or 30% of foreign currency exposure doesn’t need to be hedged back into your home country (loonie if you’re Canadian, greenback if you’re American). Of course, American investors who bought US stocks then are laughing. Similarly, if a Canadian invested much of their RRSP directly into US stocks or US equity funds denominated in US$ soon after the 2008 financial crisis and didn’t hedge currencies,  they’re probably a happy camper today. Continue Reading…