Canadian investors trying to diversify outside Canada got hit squarely in the eye by the stellar rise of the loonie. So said pension industry veteran Philip Falls when I caught up with him at Canadian Investment Review’s Global Investment Conference in Banff last month. His message—plan sponsors have had their confidence in global markets shaken because they’ve been so badly burned by currency exposure (you can watch the conversation here).
The thing is, plan sponsors have really long time horizons—and Canadian markets expose them to one major risk: they’re concentrated in rocks, trees and financials. Which is why, when the foreign property rule was eliminated in 2005, many heeded the call of global managers and moved out.
Over the long term I think it’s probably a good move—despite double-digit gains in recent years, this pace of growth in the Canadian market won’t last forever. Something’s got to give—and with inflation problems brewing in China, it’s only a matter of time before demand starts to slow and China turns off the demand taps for global (and Canadian) commodities.
A couple of new ETFs address both currency risk and the concentration conundrum in Canadian equities. They’re hedged products offering access to U.S. markets. And the product that’s grabbed the most headlines has been the new iShares Nasdaq 100 Index. It offers exposure to the Nasdaq 100 (like the QQQs—only it’s hedged. It’s Canadian dollar denominated and the U.S. currency exposure is hedged back to the Canadian dollar. It also offers exposure to high growth areas that just aren’t available in Canada large cap IT companies and healthcare. All with a management fee of just 0.35%.
It’s hard to argue with cheap.
While plan sponsors are just dipping their toes into ETFs here in Canada, low cost, currency hedged products like these could be a good way to get global diversification without the risk—and the costs.
Whether or not pension funds will bite is another story—but cheap access to a hedged product is definitely worth a second glance these days.
