Is there some kind of synthetic ETF that magnifies changes to exchange rates so that if, for example, the Canadian dollar increases by 5% with respect to the American dollar, the ETF will go up by 10% and vice versa? Is there another way to hedge against currency risk without tying up a lot of capital?
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1If you're "hedging", then presumably you already have a lot of capital tied up in securities denominated in USD. So why not buy securities in CAD?– AcccumulationCommented Oct 10, 2017 at 4:29
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@Acccumulation Right, that's the idea. This question is about exploring ways to keep investing in American securities without the currency risk.– Neil GCommented Oct 10, 2017 at 4:49
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1If you want to hedge against risk, you shouldn't be putting all your money in American securities in the first place. Doing so creates correlated risk. Some of that risk can be addressed through currency hedges, but the best hedge is to buy foreign securities.– AcccumulationCommented Oct 10, 2017 at 5:15
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1 Answer
I'm somewhat shocked that I can't find a leveraged Canadian Dollar to American Dollar ETF. It's possible one exists but if it is not on Bloomberg (or even Wikipedia) it likely doesn't exist. Interestingly, I found a CAD/EUR 3x leveraged ETF, but not a USD one.
You could look at using the CAD/EUR and EUR/USD 3x levered ETFs, but given the awful issues with leveraged ETFs I'm not even sure I can recommend this even in the short term as a solution.
The traditional way of hedging currency without tying up lots of capital is to use currency futures or forwards. The margins on these contracts are quite reasonable if you are an institution, but may be prohibitive as an individual investor. Check where you trade. Also, there can be complications about rolling these contracts that may make them a pain for an individual. Still, if you really need to do the hedging and are willing to put in the work this is the place to start.
Of course, if you are looking for a hedged common index like the S&P 500, that type of ETF certainly exists and it is cheap and you avoid the margins.
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1Thanks, this is a great answer. Can you explain in more detail how the S&P 500 helps me hedge?– Neil GCommented Oct 10, 2017 at 4:46
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Sorry. I could have been more clear. An ETF over the S&P 500 index wouldn't help you currency hedge, but there exists CAD-hedged ETFs of the S&P 500 and other common indexes for Canadian investors (see the Wikipedia link). In these the manager of the ETF does the hedging for you. If your original goal was to hedge your investment in a common US index these may be the best solution for you.– rhaskettCommented Oct 10, 2017 at 5:01