I (Canadian) recently began using Questwealth managed portfolios for my 25 year+ and 10-15 year horizon portfolios, as I wanted something more automated, and they are far more cost effective than mutual funds. However, I have been uneasy about how much USD currency exposure they have, given its strength (or overvaluation?) at the time I transferred my funds in. Investing in USD from CAD is a bet USD will continue to strengthen relative to CAD, and I don't know that it will.
I recently discovered Horizons managed portfolios (HBAL.to and HGRO.to) which are a similar solution to my desire for a passive strategy, but are currency hedged, with an even lower management fee. I considered transferring all into those, but hedging currency exposure 100% is just the opposite bet on the direction of the CAD/USD exchange rate. I am betting that USD will weaken in relation to CAD, and I don't know that it will.
That’s when it occurred to me. Traditional portfolio compositions (70/30, for example) make use of the magic of regular rebalancing to sell a little of whatever is overperforming and buy a little of whatever is underperforming to maintain a consistent ratio of asset types according to your risk level – if I understand the purpose of rebalancing correctly. I remember reading a very thorough article once that suggested that in most cases historically (TINA excluded) the right allocation and consistent rebalancing actually allowed the portfolio to outperform any of its constituents alone (namely equity) over the long term via what is essentially an automated schedule of buy-low/sell-high in small doses.
So why couldn’t I apply the same principle of rebalancing to currency hedging my portfolios to take advantage of fluctuations in the CAD/USD exchange rate in either direction over the long term?
To look at the simpler of the two examples, while the assets within HBAL and Questwealth’s Balanced Portfolio are different, they are very similar, and contain a fair amount of overlap in class and returns. The major difference to me is that one holds its assets primarily in USD, and the other is entirely currency hedged to CAD – all other differences between the two amount to slightly more diversification for similar risk/return trade off. All in one, or all in the other, I am making a bet on the direction of the USD/CAD relationship.
However, if I were to make my portfolio a balance of 50% of each, and maintain that balance for the long term, would I not be able to actually take advantage of fluctuations in the USD/CAD exchange? If the USD soars, my USD portfolio would overperform (as valued in CAD) and rebalancing would sell some U.S. assets at a high to buy some more of the underperforming CAD-hedged (rough) equivalents at a low. If the USD falls, my CAD-hedged portfolio would overperform, and rebalancing would sell some of the CAD-hedged assets at a high to buy some of the underperforming (as valued in CAD) USD assets at a low. Over the long term, with regular rebalancing, would this not work out to improved returns over going either 100% hedged or unhedged?
tl;dr: Is a 50/50 split between USD assets and CAD-hedged equivalents with regular rebalancing the most efficient, automated, and low-risk way to neutralize or even profit from currency fluctuations over the long term given their cyclical relationship?
Submitted August 24, 2022 at 12:58AM by livewithit https://ift.tt/YgzZt4i
