Hedged index fund adds US stocks to your portfolio

TD US Index Currency Neutral Fund-e gives you foreign index content, hedges your currency exposure and keeps your costs low.

Index funds that track broad market indexes offer you no hope of exceptional returns beyond what their underlying index provides. But they also offer practically no risk of substantially below-market returns. So if you’re content with market returns year in and year out, these funds can make sense for you.

US stocks to your portfolio

This fund lets you add US equities to your portfolio without adding currency exchange risk.

They can also make sense for you to help cover off the foreign component of your portfolio if you don’t want to spend a lot of time researching US stocks. One index fund we like that gives you broad exposure to the US large-cap market is TD US Index Currency Neutral Fund-e (Fund code: TDB904 (NL)).

This fund seeks to achieve results that are similar to the S&P 500 Total Return Index. This index is regarded as the best single gauge of US large-cap stocks. It includes 500 leading companies and captures about 80-per-cent coverage of available market capitalization.

Hedging eliminates currency exchange exposure

The fund also seeks to mostly eliminate its foreign-currency exposure. It uses derivative contracts, on an ongoing basis, to achieve this end. Its hedging strategy attempts to protect against losses from declines in the value of the US dollar against the Canadian dollar.

The drawback of this strategy is the fund will not benefit from increases in the value of the US dollar against the Canadian dollar. This, of course, may occur in the short term, as the US currency is frequently regarded as a place to put money in times of global uncertainty. Then too, the US Federal Reserve is more likely than the Bank of Canada to boost interest rates this year, and that too is bullish for the greenback.

On the other hand, we regard the Canadian dollar as undervalued. Moreover, it has the potential to rise if global economic activity picks up and our resources once again enjoy considerable demand. Under these circumstances, a rising loonie would reduce your returns from unhedged US equities.

Unhedged version may be better for snowbirds

If you don’t want a currency hedge, then you should consider the unhedged version of the fund (Fund code: TDB902 (NL)). You may want to do this if have a considerable need for US currency, like vacationing snowbirds in the winter.

Another thing we like about TD US Index is it has small contribution limits, thus making dollar-cost averaging easy at a time when the US market is arguably somewhat on the expensive side.

The management expense ratio is 0.50 per cent.

TD US Index Fund-e is a buy if you want index-like returns with some foreign-currency protection and you can tolerate medium investment risk.

This is an edited version of an article that was originally published for subscribers in the May 3, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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