What currency hedging actually does, what it costs, and whether hedged or unhedged is right for your portfolio.
Most of the world's investable assets are denominated in currencies other than Canadian dollars — primarily US dollars. When you buy a US equity ETF, you're exposed to two sources of return: the performance of US stocks, and the movement of the USD/CAD exchange rate.
If the CAD weakens against the USD (as it often does in risk-off environments), your US holdings become more valuable in Canadian dollar terms — a windfall. If the CAD strengthens against the USD, your US holdings lose value in CAD terms even if the underlying stocks held steady.
Currency hedging is a mechanism that neutralizes this exchange rate effect. A hedged ETF uses currency forward contracts to lock in the exchange rate, so that your return tracks the underlying equity performance in local currency — without the CAD/USD fluctuation.
The question: is that neutralization something you actually want?
An ETF that holds US stocks and is currency-hedged to CAD enters into forward contracts to sell USD and buy CAD at a fixed future exchange rate. The gain or loss on these contracts offsets the exchange rate impact on the portfolio.
The cost of a forward contract reflects the interest rate differential between the two currencies. When US interest rates are higher than Canadian rates (as they often are), hedging US exposure costs money — roughly equal to the interest rate differential. When Canadian rates are higher, hedging can actually provide a small benefit.
Through much of 2022–2025, US interest rates were 0.5–1.5% higher than Canadian rates, making USD hedging cost approximately 0.5–1.5% per year above the ETF's stated MER. This is a hidden cost that many investors overlook.
Each major Canadian ETF provider offers both hedged (CAD) and unhedged versions of their US and global equity funds. The hedged versions typically carry "CAD Hedged" or "(H)" in their name.
| Unhedged ETF | Hedged Version | MER Difference | Hedge Cost (approx. 2026) | Total Cost Difference |
|---|---|---|---|---|
| XSP (iShares S&P 500 CAD) | Already hedged | — | ~0.5–1.0%/yr | Embedded in tracking difference |
| VFV (Vanguard S&P 500, CAD unhedged) | VSP (hedged) | +0.05% | ~0.5–1.0%/yr | VSP costs ~0.5–1.0% more/year |
| XEF (iShares MSCI EAFE, unhedged) | XFH (hedged) | +0.05% | Varies by currency mix | Depends on rate differentials |
| VIU (Vanguard FTSE Developed ex-NA) | VIH (hedged) | +0.05% | Varies | Typically adds 0.2–0.8%/yr |
| XEQT (iShares all-equity, unhedged) | No hedged version | N/A | N/A | Currency exposure is accepted |
The hidden hedging cost: The stated MER difference between hedged and unhedged ETFs is small (0.05%). But the actual cost difference is larger because of the currency forward contract cost, which is embedded in the tracking error, not the MER. Look at the "tracking difference" (the gap between the ETF's return and its benchmark) to see the true total cost including hedging.
The CAD/USD exchange rate has ranged from near parity (around 1.00) in 2007–2012 to lows around 0.69–0.73 during commodity price crashes and economic slowdowns (2015, 2020, 2023–2026). The Canadian dollar tends to weaken when commodity prices fall (oil, lumber) and when there's global risk aversion — precisely the environments when equity markets also fall.
This correlation between CAD weakness and equity weakness is actually useful for unhedged Canadian investors: when your US equities fall, the weaker CAD partially cushions the blow in Canadian dollar terms. Conversely, when equities rise (often accompanied by CAD strength), your unhedged gains are somewhat reduced.
This "natural hedge" effect means that for long-term equity investors, the currency volatility in unhedged global equity ETFs is lower than it first appears — because the CAD and equity markets are partially correlated.
Academic research on whether currency hedging helps or hurts long-term equity investors is inconclusive. Over periods of 10–20 years, the CAD/USD rate tends to revert toward purchasing power parity. The hedging costs (forward contract costs) are not trivial. Most Canadian finance academics and the research teams at Vanguard Canada have concluded that hedging equity exposure is not recommended for long-term equity investors — the cost typically exceeds the benefit.
Vanguard Canada's position: Vanguard Canada has stated publicly that their XEQT, XBAL, and similar all-in-one ETFs are intentionally unhedged in their equity exposure. Their reasoning: for long-term investors, the cost of hedging exceeds its diversification benefit, and currency diversification itself has some value in a portfolio.
Hedging isn't always wrong. There are situations where it makes sense:
For long-term equity investing (10+ years): skip the hedge. Accept currency exposure as part of global diversification. The cost of hedging is certain; the benefit is speculative.
For bonds and short-term savings: hedge or use CAD-denominated assets.
VFV (Vanguard S&P 500, CAD, unhedged) and VSP (Vanguard S&P 500, CAD-hedged) are the most commonly discussed hedged/unhedged pair in Canada. The divergence between them illustrates the real-world impact:
Over any given 10-year period, the difference between VFV and VSP has been largely attributable to hedging costs rather than directional currency benefit — the CAD/USD reverted toward its long-run average, and the hedging costs (embedded in tracking difference) created a small but persistent drag on VSP.
Practical recommendation for most Canadians: Hold VFV or an unhedged global equity ETF (XEQT, VEQT) for long-term equity exposure. Don't pay for currency hedging on a 20-year equity investment. Reserve hedging consideration for bond funds and money you'll need within 5 years.
Most Canadian bank mutual funds that hold international equities are either unhedged or partially hedged. The hedging methodology is rarely disclosed clearly in fund fact sheets. The MER already embeds any hedging costs — but again, the true cost may be hidden in tracking difference rather than the stated MER.
If your bank mutual fund holds US equities (most balanced and global equity funds do), ask your advisor whether the fund is currency hedged and what the approximate annual cost of that hedge is. In most cases, you'll find the answer isn't clearly disclosed — which is itself a reason to prefer ETFs with transparent methodology.
For most long-term Canadian investors, unhedged global equity ETFs like XEQT or VEQT are the right default. The hedging costs are rarely worth it for equity over long time horizons.
Best Canadian ETFs All-in-One ETF GuideThis page is for educational purposes only and does not constitute financial advice. Currency exchange rates, hedging costs, and ETF characteristics change over time. Consult a registered financial advisor before making investment decisions.