Canadian ETFs & Currency Hedging Attention, Canadians!
If you are Canadian or even an American who trades on the TSX, I want to bring some very interesting discoveries to your attention. If you read my last post on ETFs, those were all American-based. I was researching Canadian-based ETFs for a similar post, and I came across something absolutely interesting that I thought I would share here because it has significant advantages for Canadians, like myself, who actively trade US equities.
And what is this discovery, you ask? Well, it's the equally weighted ETFs of the S&P, NDX, and some stocks and crypto, of course! The best part? They are much cheaper than buying SPY or QQQ and much safer than holding UPRO or SPXL longer term because they are meant to be an investment mechanism, unlike UPRO and SPXL, which target speculative traders.
So let's get into it!
📈 TSX: QQEQ.F 📈
This is the equally weighted ETF, hedged for CAD, of the NASDAQ (Index: NDX, Futures: NQ1! But better known as QQQ). Currently, it is trading around $20.18 CAD. It's relatively new, hitting the market in May 2021, but it moves identically to QQQ (hence the equal weight). It is actually by the same company that manages QQQ (INVESCO).
You can see by the chart that it has pretty low volume at the moment:
But if we take a look at the gains on this vs QQQ, we will see that they are fairly comparable:
From our October low till now, QQQ did outperform slightly, but there is somewhat of an expected divergence in return relating to the effect of adjusting for currency.
The disadvantage is that volume is incredibly low on this, and I mean incredibly low. Looking at Yahoo Finance, on November 20th, only 400 shares were traded. On November 21st, 200 shares were traded, with no shares being traded between November 13 and November 15th. A little bizarre, but I am going to be trying it out because the gains are pretty identical to QQQ.
📈 TSX: EQL 📈
Another INVESCO treat, this has much better volume and is the equal weight of the S&P (AKA SPY) hedged in CAD. Also, very comparable performance:
Again, not precisely identical because of the effect of the currency exchange, but pretty good.
📈 TSX: TECH (or FANGMA) 📈
I chuckled at this name, FANGMA. Sounds like some kind of vampire thing. But I get it because the same goes for FAANG in general. This ticker has amazing volume and holds all the big-name tech. It comprises Facebook, Amazon, Netflix, Google, Microsoft, and Apple.
This is another equally weighted portfolio meant for investors interested in tech. It moves like any tech stock, averaging about 2 to 3% moves in a day. US volatility from the comfort of the TSX, who would've thought?
📈 TSX: BA 📈
One thing that I learned from uh, doing this little research here is that, in addition to maple syrup, licentiousness, and politeness, Canadians seem to enjoy their tech and airplanes. I suppose my love of BA is a shared delusion amongst us Canucks because the CAD Hedged Boeing shares have great volume and are highly traded on the TSX:
Again, pretty on par with the actual BA stock, in fact, pretty close:
And all for just $38.52 a share!
There are some other, more boring ones like:
US Yields: TSX: RUBH
But the more impressive one is:
₿ TSX: BTCC.B ₿
You know how the Americans were getting all hot and bothered by that new BTC ETF that is in the works? Well, Canada already had it in February 2021 in the form of BTCC.B:
It was the first and I think still is the only one (until the US ones receive approval) released that physically holds BTC. Thus, when you buy this ETF, you are actually holding BTC, vs the current BTC strategy ETFs which don't actually hold BTC.
Again, pretty similar, and this is like-to-like (BTCC.B vs BTCCAD).
📈 TSX: NVDA (NVIDIA CDR CAD HEDGED 📈
Yup yup. NVDA! Yay!
All at a cost of $44.47 CAD 🤑. With identical gains:
[https://www.tradingview.com/x/730KOCQb/
Again, expect a bit of variance in the gains owning to the currency fluctuations, but for the most part, as it is CAD hedged, it is attempted with the best efforts to mitigate extreme variations in currency exchange rates.
🤔 So what exactly is a "currency-hedged" stock and how is it "hedged" exactly? 🤔
This is a fantastic question and in researching this article and talking about these stocks, I was like "huh… what does this even mean?" So, a bit more research later, let me attempt to explain!
Currency hedging is a strategy used to mitigate the risk of currency fluctuations when investing in foreign assets. Currency-hedged funds use derivatives called futures to lock in a set exchange rate between two currencies. This means that the changes in the exchange rate between the two currencies will not affect the value of the fund, and investors will only get the movements of the underlying stocks.
For example, let's consider a theoretical stock (Ticker XXX) that is listed on the NYSE and its equivalent which is CAD hedged on the TSX. XXX on the NYSE is not currency hedged, which means that the value of the stock will be affected by the fluctuations in the exchange rate between the US dollar and the Canadian dollar (or whatever currency it is hedged on). On the other hand, XXX CAD hedged on the TSX is currency hedged, which means that the value of the stock will not be affected by the fluctuations in the exchange rate between the US dollar and the Canadian dollar.
To achieve currency hedging, the fund manager will use something called “currency forwards”, which are essentially futures contracts on currencies. Currency forwards allow the fund manager to lock in a specific exchange rate on a future date, which eliminates the effect of fluctuating exchange rates.
This is done in addition to holding the actual stock. Thus, investing in currency-hedged tickers does indeed affect the underlying, as more demand for currency-hedged XXX will increase the fund manager’s or institutions holding of XXX and thus increase the value of XXX through basic supply and demand principles. This also creates the ability, for sophisticated investors and those who read my post on arbitrage and pairs trading, to take advantage of pricing inefficiencies between the currency-hedged version and the actual stock, wink wink, hint hint 😉.
So, what are the advantages of holding CAD-hedged ETFs of US equities? 💰❓
There are actually many. First and foremost, if you are like me and very risk-averse, these are, at the end of the day, meant as investment mechanisms. It's not like holding UPRO or TQQQ or SQQQ, where there is inherent decay, and the longer you hold, the worse it gets. If a trade goes against me on a major US index, I can just wipe my hands and be like “Forget it. I’m in it to win it. I got time!” and never sell until I finally am in profit. It’s kind of the purpose of them!
But there are some other pragmatic advantages that I don’t think many people think about or even consider, especially Canadians. These include:
🎯 Stability: Currency exchange rates can be volatile and can significantly impact the returns of foreign investments. A currency-hedged ETF aims to reduce or eliminate the impact of currency fluctuations on the investment, providing a more stable return in the investor's home currency.
🎯 Easier Performance Evaluation: Hedging currency risk can make it easier for investors to evaluate the actual performance of the underlying assets in their home currency without the interference of currency movements.
🎯 Risk Reduction: Currency movements can introduce an additional layer of volatility to an investment portfolio. By hedging currency risk, investors can potentially reduce the overall volatility of their portfolio.
So should you use these instruments over buying pure SPY, QQQ or whatever else? Well, it depends. It depends on what you want to do with it. For me, this works well. However, for some who like to gain a little extra somethin’ somethin’ on the side and sell options against their shares, it’s probably going to be better to stick with trading the actual, “ official ” instrument.
This is something that I used to like to do, but buying 500 shares of SPY or QQQ significantly ties up a lot of capital. For the same capital it would take me to buy 500 shares of SPY, I could buy over 8,226 shares of EQL:
Let’s say I invested at the start of the uptrend in that chart above. Investing in EQL (8,226 shares), my profit here would have been $19,166.58 (or 13,982.50 USD adjusted for the current exchange) vs 500 shares of SPY on the same move being $5,630 (or 7,717 CAD adjusted for the current exchange):
But you don’t even need to go that aggressive; you do 3,000 shares of EQL, and the profit still is on part of that of SPY at much less cost. So while selling options and such could be an advantage, it's not the only consideration that should be minded.
But at the end of the day, the decision as to whether or not it’s the right way for you is a personal question. As a personal anecdote, as far as the indices are concerned, this is the way to go if you’re Canadian. I still invest in some US companies that I am a die-hard fan of (such as GRMN, BA — which will be shifted to equal investment of CAD hedged and actual BA, because I do like selling options on BA — IRDM, MSFT). I can sell options on those stocks already to supplement those earnings or those downfalls. Selling options on indices at this point isn’t all that appealing, especially with the crazy market swings. But again, personal decisions one must make!
And those are my thoughts; hope you learned something!
