Part of the move has also been driven by strength in the U.S. dollar. The greenback has historically benefited from flight-to-safety demand during periods of geopolitical stress, while the higher-for-longer U.S. interest rate environment has also helped support the currency relative to its peers.
I bring this up because many Canadian investors own exchange-traded funds (ETFs) with substantial U.S. exposure. When you buy one of these ETFs without a currency hedge, your return is determined by more than what happens to the underlying stocks. Fluctuations in the Canada-U.S. dollar exchange rate can either add to or subtract from your Canadian-dollar return.
For investors who don’t want that additional source of volatility, Canadian ETF providers frequently offer currency-hedged versions of their funds. These provide the same underlying market exposure while using derivatives designed to mitigate the impact of movements between the Canadian and U.S. dollars. In many cases they are available for the same management expense ratio (MER) as the unhedged funds they are based on.
The question is whether that hedge is actually worth having. As with many things in investing, “it depends.” Here’s what Canadian investors should weigh before choosing between hedged versus unhedged ETFs.
To hedge or not to hedge?
The easiest way to understand currency hedging is to compare two nearly identical S&P 500 ETFs listed on the Toronto Stock Exchange.
The Vanguard S&P 500 Index ETF (VFV) is the unhedged option, with a 0.09% MER. Although VFV trades in Canadian dollars, its underlying stocks are U.S. companies valued in U.S. dollars. That means Canadian investors remain exposed to movements between the two currencies.
If the U.S. dollar strengthens against the Canadian dollar, that provides a tailwind. The U.S.-dollar value of the underlying investments translates into more Canadian dollars. Conversely, a strengthening Canadian dollar reduces the Canadian-dollar value of those same U.S. assets, creating a headwind even if the underlying stocks themselves perform well.
Its counterpart is the Vanguard S&P 500 Index ETF (CAD-hedged) (VSP). It also charges a 0.09% MER and owns essentially the same equity exposure, but uses derivatives to mitigate movements between the Canadian and U.S. dollars. A strengthening U.S. dollar therefore provides little benefit, while a strengthening Canadian dollar should do considerably less damage.
There is technically a third option if you already have U.S. dollars: buying the Vanguard S&P 500 ETF (VOO) directly. This U.S-listed fund provides unhedged exposure at a lower 0.03% expense ratio. Holding VOO directly inside a registered retirement savings plan (RRSP) can also avoid the 15% U.S. withholding tax on dividends that applies to Canadian-listed ETFs holding U.S. stocks. The trade-off is that you need U.S. dollars, making your brokerage’s foreign exchange costs an important consideration.
What has historically come out on top?
Looking backward requires some caution because any comparison between hedged and unhedged ETFs is heavily influenced by what currencies happened to do during the period selected. Over the period from January 2017 through July 2026, for example, VFV comfortably beat VSP.
| Portfolio performance statistics | ||
| Metric | Vanguard S&P 500 Index ETF | Vanguard S&P 500 CAD hedged |
| Start balance | $10,000 | $10,000 |
| End balance | $39,613 | $33,669 |
| Annualized return (CAGR) | 15.45% | 13.51% |
| Standard deviation | 13.09% | 15.68% |
| Best year | 35.24% | 30.17% |
| Worst year | -12.59% | -19.25% |
| Maximum drawdown | -18.55% | -24.90% |
| Sharpe ratio | 1.02 | 0.76 |
| Sortino ratio | 1.69 | 1.16 |
Source: Portfolio Visualizer
That does not establish that unhedged ETFs are inherently superior. This period included consistent U.S. dollar strength, which benefited Canadian investors holding U.S. assets. There have been very different environments historically, including periods like 1953 to 1960 when the loonie traded above parity with the greenback in the US$1.02 to US$1.06 range.
Currency movements can also affect portfolio risk in less obvious yet positive ways. Over this longer comparison, VSP actually experienced higher volatility and a deeper maximum drawdown than VFV. One potential explanation is the safe-haven behaviour of the U.S. dollar.
During periods of severe market stress, investors have historically sought refuge in U.S.-dollar assets. For a Canadian investor holding an unhedged U.S. equity ETF, that currency appreciation has partially offset falling stock prices. A currency-hedged ETF largely removes that potential cushion.
The problem with trying to predict currencies
Looking at today’s exchange rate makes hedging tempting. If you believe the Canadian dollar is unusually cheap and likely to recover, buying VSP instead of VFV effectively protects you from the potential drag that a strengthening loonie would impose on your U.S. investments.
The problem is that you have now introduced a currency forecast into your investment strategy. Foreign exchange rates respond to an enormous number of variables. Interest-rate differentials, inflation expectations, economic growth, commodity prices, trade balances, fiscal policy, central-bank decisions, geopolitical events, and investor risk appetite can all affect the CAD-USD exchange rate.