Currency Neutral Funds

May 13th, 2008 by Potato

The Canadian Capitalist just ran two posts on the hidden costs of “currency neutral” mutual funds.

There are of course, the non-hidden costs of currency hedging. For the TD e-series funds that track the S&P 500 in the US, the currency neutral version has a MER that is 0.15% higher than that of the single currency (USD or CAD) version (0.48% vs 0.33%). To me that seemed like a very small cost for protection from any further rises in the Canadian dollar (or weakness in the American one). I didn’t know about or consider that tracking error might be worse with the currency neutral version, so now I’m going to have to re-think how likely I think more increases in the Canadian dollar are likely, and maybe make my asset allocation more complicated by having some of my US exposure in currency neutral, and some straight-up depending on that likelihood…

Another thing that I hadn’t considered is that some of my US buying has been in USD (e.g., the Dow Jones index from TD). I thought at first that it wouldn’t matter which currency I bought the index in, and that possibly the USD version would track better. However, after checking more closely, it looks as though I may be losing out to the tune of 1-2% in the currency exchange rate by buying the USD version. Since this will only affect me when I buy and sell, and since I plan to hold it for many years, this should wash out as being pretty negligible and I won’t get upset about what I’ve already bought, but perhaps in the future I’ll buy the version of the fund that’s in Canadian dollars to make the most of my money (though I don’t know if that exchange fee is then lost within the fund as a tracking error).

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