Should You Hedge Your U.S. Dollar Exposure ?

 

 

If you hold U.S. investments while living in Canada, you’re exposed to two moving parts: the return of your investment and the exchange rate between the Canadian and U.S. dollar. With the loonie sitting where it is today, the question of whether to hedge your U.S. exposure has become more relevant again.

 

 

What Currency Hedging Actually Does

 

Hedging is simply a way to reduce the impact of currency fluctuations. It “locks in” an exchange rate, so your returns reflect the asset’s performance rather than movements in USD/CAD. This can be done through currency-hedged ETFs or contracts that offset currency swings.

 

It’s not a guarantee of profit — just a way to trade potential upside for stability.

 

 

The Pros of Hedging

• Reduced volatility: If the Canadian dollar strengthens, your U.S. holdings lose value when converted back. Hedging cushions that impact and helps smooth out returns.
• Predictability: For those drawing income or planning withdrawals, hedging provides a clearer picture of what your portfolio is worth in Canadian dollars.
• Focus: It allows you to evaluate your investments on their fundamentals, not short-term currency noise.

 

The Cons

• Cost: Hedging isn’t free. There’s a drag from the interest-rate gap between Canada and the U.S., along with transaction costs.
• Lost upside: If the U.S. dollar strengthens, a hedged position won’t benefit from that extra lift in value.
• Complexity: Hedged products can behave differently than expected, and results may not perfectly mirror currency moves. 

 

 

The Cost of Doing Nothing

 

Staying unhedged — as most investors do — can work well when the U.S. dollar is rising. But it also leaves you exposed when the loonie gains strength. Over time, currency swings can either quietly add or subtract from returns, and those compounding effects add up.

 

Doing nothing is still a choice. It means accepting that part of your return is tied to a currency bet, whether intentional or not.

 

 

When Hedging Might Make Sense

 

Hedging isn’t all-or-nothing. Investors often use a partial approach, hedging part of their U.S. exposure to reduce volatility without giving up all potential upside.

 

A few guiding thoughts:

• If you have short-term goals, hedging can provide peace of mind and smoother outcomes.
• If you have a long-term horizon or believe the U.S. dollar will remain strong, staying unhedged may make more sense.
• Either way, it’s worth revisiting as markets and interest rates evolve.

 

 

Final Thoughts

 

Currency movements can make a meaningful difference to long-term results, but there’s no perfect answer. Hedging brings stability, but at a cost. Staying unhedged keeps things simple, but adds volatility and uncertainty.

 

The right approach depends on your goals, time horizon, and comfort with short-term fluctuations. If you’d like to see how different hedge ratios could affect your own portfolio, I’m happy to walk through the numbers and help you decide what makes the most sense today.

 

-Vincenzo Marozzi