Why hedge currency risk

Currency hedging can be a powerful tool to help limit the impact foreign exchange rates can have on the Canadian dollar value of a Canadian investor’s foreign assets. Similar to insurance you’d buy for your car, currency hedging protects your investment against external factors. A hedging strategy can help ensure investment returns are based solely on the change in value of the underlying assets.

As a Canadian, there are two factors that you need to always consider when investing in foreign securities: stock risk and currency risk. Let’s say you are buying a US stock. You generally buy the stock because you like the business, the company fundamentals and believe the stock has potential upside. However, as a Canadian investor, you must also factor in US dollar fluctuations, which could positively or negatively impact your net return in Canadian dollars.

How we hedge foreign currency risk

At Purpose, we hedge US dollar currency exposure in our funds by selling our US dollars in the equivalent amount of the portfolio’s US dollar asset exposure, and buying the equivalent amount in Canadian dollars. We typically use currency forward contracts to accomplish this. Most often, these are rolling 30- to 90-day contracts, which are the most efficient and cost-effective way to hedge currency exposure. When currency risk is eliminated from the portfolio, positive and negative changes in the value of the US dollar will have no impact on the investment.

Costs associated with hedging

The cost of hedging is broken down into two key components: exchange rate differential (implicit costs) and transaction costs (explicit costs). Hedging has very little in actual fixed costs (transaction fees), but has other costs that are important to understand, similar to the way the cost of home or car insurance can be broken down.

Exchange rate differential

Generally, the return of currency forward contracts, assuming no change in exchange rate, will have a cost or benefit equal to the yield difference of short-term interest rates between the two currencies being hedged. For example, if interest rates in Canada were 1% higher than in the US, then independent of exchange rate movements, a Canadian would have a ~+1% benefit by hedging the currency over a year.

Transaction costs

There are transaction costs for each forward contract trade. Typically the transaction costs for a 100% hedged portfolio will be ~5-10 bps per annum.

The Purpose suite of currency hedged funds

Fund ETF ticker symbol FundSERV codes Structure Management fee Series A trailing commission Distribution frequency
Purpose Premium Money Market Fund  A: PFC2200

F: PFC2201

Corporate class 0.20% 0.25% Monthly
Purpose Short Duration Tactical Bond Fund SBND  A: PFC2600
F: PFC2601
Investment trust 0.25% 0.50% Monthly
Purpose Tactical Investment Grade Bond Fund BND  A: PFC2100
F: PFC2101
Investment trust 0.35% 0.50% Monthly
Purpose Floating Rate Income Fund FLOT A: PFC3300

F: PFC3301

Investment trust 0.85% 0.50% Monthly
Purpose Strategic Yield Fund SYLD  B: LGQ800
F: LGQ802
Investment trust 0.80% 0.75% Monthly
Purpose Energy Credit Fund PCF  A: RAM1000
F: RAM1001
Investment trust 0.70% 0.50% Monthly
Purpose Total Return Bond Fund PBD  A: PFC100
F: PFC101
Corporate class 0.45% 0.50% Monthly
Canadian Investment Grade Preferred Share Fund P2L RIGP.UN Closed end 0.95% 0.80% Monthly
Purpose US Preferred Share Fund RPU  A: RAM800
F: RAM801
Investment trust 0.80% 0.75% Monthly
Investment Grade Managed Duration Income Fund PFU.UN Closed end 1.10% Monthly
Purpose Core Dividend Fund PDF  A: PFC400
F: PFC401
Corporate class 0.55% 1.00% Monthly
Purpose US Dividend Fund PUD  A: PFC1500
F: PFC1501
Investment trust 0.55% 1.00% Monthly
Purpose International Dividend Fund PID  A: PFC1700
F: PFC1701
Investment trust 0.55% 1.00% Monthly
Purpose Canadian Financial Income Fund BNC  A: PFC2400
F: PFC2401
Corporate class 0.55% 1.00% Monthly
US Banks Income & Growth Fund PUB.UN Closed end 1.00% 1.00% Monthly
Purpose Best Ideas Fund PBI  A: PFC700

F: PFC701

Corporate class 0.65% 1.00% Annually, if any
Purpose Premium Yield Fund PYF  A: PFC2300

F: PFC2301

Corporate class 0.60% 1.00% Monthly
Purpose Tactical Hedged Equity Fund PHE  A: PFC300

F: PFC301

Corporate class 0.80% 1.00% Annually, if any
Purpose International Tactical Hedged Equity Fund PHW  A:PFC1600

F: PFC1601

Corporate class 0.80% 1.00% Quarterly
Purpose Enhanced US Equity Fund PEU  A: PFC1300

F: PFC1301

Corporate class 0.80% 1.00% Annually, if any
Purpose Duration Hedged Real Estate Fund PHR  A: PFC800

F: PFC801

Corporate class 0.65% 1.00% Monthly
Purpose Silver Bullion Fund SBT Investment trust 0.40% Annually, if any
Purpose Conservative Income Fund PRP  A: PFC2500

F: PFC2501

Corporate class 0.55% 1.00% Monthly
Purpose Monthly Income Fund PIN  A: PFC200

F: PFC201

Corporate class 0.55% 1.00% Monthly
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. The indicated rate of return is the historical annual compounded total return including changes in share/unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated