On September 4, 2019, from John G….. Ontario, Canada
The three Canadian ETF’s which follow, mirror the S&P 500:
- BMO S&P 500 INDEX CAD UNT ETF Symbol ZSP (not currency-hedged)
- VANGUARD S&P 500 Index ETF, Symbol VSP (currency-hedged)
- iShares Core S&P 500 Index ETF, Symbol XSP (currency-hedged)
Over the last decade, as expected, XSP and VSP have appreciated as much as the S&P 500 has — a little over 100%. ZSP has appreciated about 180%.
Please explain the difference.
Monday Morning Millionaire Program Answer:
Currency hedging removes the effect of foreign exchange fluctuations.
For instance, if your ETF was CAD-hedged and the CAD weakened relative to the US dollar by 5% over a certain period during which the S&P500 rose 15%, then your return would be 10% for that period. If the CAD appreciates relative to USD, then the opposite is true, of course.
Non-hedged means you will get the return of the S&P500 in USD terms and you benefit if USD gains strength over the CAD.
Over the last decade, USD has strengthened relative to the CAD, which is why ZSP (non-hedged) has outperformed.