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  5. VFV: In the last 12 months, the canadian dollar has fallen on average about 72 cents to now under 70 cents approximately, therefore if I understood the hedge vs unhedged issue correctly, VSP should have... [Vanguard S&P 500 Index ETF]
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Q: In the last 12 months, the canadian dollar has fallen on average about 72 cents to now under 70 cents approximately, therefore if I understood the hedge vs unhedged issue correctly, VSP should have outperformed VFV. it looks like the complete opposite in 1 year returns. Why is that ?
Asked by Ernest on January 23, 2025
5i Research Answer:

VFV is unhedged while VSP is hedged, and both are denominated in CAD.

Since VSP is hedged, it is equivalent to just the S&P 500 returns. The hedge is intended to protect investors from any potential appreciation of the CAD to the USD, since the ETF holds USD stocks. For example, if the S&P 500 returned 10% in a year, but the Canadian dollar appreciated relative to the USD, an investor holding an unhedged ETF would have a lower return than 10%, but the hedge works to offset this. 

As VFV is unhedged, it is the S&P 500 returns + FX changes, and since the USD has appreciated relative to the CAD, when it is converted back to Canadian dollars, the ETF benefits from the FX changes relative to a hedged ETF.

 

Authors of this answer, directors, partners and/or officers of 5i Research and/or affiliated companies have a financial or other interest in VFV.