Stockchase Opinions

John DeGoey BMO SP 500 HEDGED CAD IDX ETF ZUE-T COMMENT Jan 10, 2022

This was actually a technical question not related specifically to ZUE. The caller asked what is the difference between a Canadian hedged ETF and a Canadian unhedged ETF. This is basically a currency question. The hedged gets exposure in U.S. with dollars converted to Canadian. With the unhedged you're buying in one currency and that's that. With hedged you can take the currency conversion out of the equation. He thinks the Canadian dollar will appreciate.
$66.900

Stock price when the opinion was issued

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DON'T BUY

This is a hedged product which means you are factoring out the Cdn/US dollar issue. He would go unhedged, because he believes that the Cdn$ is likely to continue to be weak compared to the US$.

TOP PICK

An S&P 500 tracker, hedged to the loonie. It is hedged and he thinks this is a critical difference. If you really want to get into the US market, now is probably a wise time to be doing it with a hedge. For people buying individual US securities, you are going to have a challenge going forward. Even if the US stock market does well, and if the Cdn$ also does well, which he expects, whatever gains you make in the stock market, you will be giving back when you do the currency conversion.

PAST TOP PICK

(A Top Pick Oct 20/15. Up 6.81%.) The US stock market is about half of the world’s stock market capitalization, and he likes this one because it is currency hedged. Had felt that the Cdn$ was probably as low as it was going to go relative to the US$, and as the Cdn$ rose in value, you would need a hedge to minimize the losses.

COMMENT
Both of these are hedged back to the CAD. In an inflationary environment, you may want a mix of hedged and unhedged. In a more resource oriented market, the CAD will do well. Really with the largest companies in the world. Would suggest to hold both NASDAQ and S&P500 and rebalance once a quarter or year.
BUY
ZUE vs. XSP Almost identical. Track the same index, structure is the same by holding the 500 stocks in the S&P 500 and applying the currency hedge so movements in the CAD don't impact the NAV as much. Long term, did a good job insulating from currency moves. XSP is 10 bps, ZUE is 9. Long term, US large caps should be the core of a lot of portfolios. Risky, as it was this year, but you should still have it.
PARTIAL BUY
ZUE vs. ZUB

US banks have been on fire, though valuations are higher. Interest rate margins are good. Do you expect banks to outperform? He suggests holding 25% in ZUB and 75% in the diversified S&P. It depends on how confident you are about the US banks.

COMMENT
How does hedging work on the USD vs. CAD? Need to buy hedged ETFs/stocks if buying US stocks/ETFs in CAD?

With the CAD declining vs. USD, it's time to think about locking in gains. Consider ZSP (S&P) vs. ZUE (S&P currency-hedged) where the difference lies in the exchange rate. Also consider if you're trading in a taxable account or not. As CAD weakens, ZSP (having more US exposure) will outperform. Therefore, ZUE (hedged) will outperform once the CAD gets stronger. In a registered account, sell ZSP and buy ZUE. If in a tax account, this is an individual financial planning decision. 

HOLD

He'd be in favour of holding at least some positions hedged to the CAD. The hedging will eventually work in your favour.

BUY
ZSP vs. ZUE

The CAD has weakened, and ZSP has the USD in it. So, he much prefers ZUE. Because interest rates are much lower than the U.S., it will cost you 1.25% in hedging. Weigh that 1.25% over, say 5 years, to where the CAD-USD exchange will go. If you expect the CAD to strengthen, then ZUE will give you a better payout than ZSP. Be hedged over not.