Dear Expert,
Is it possible to have part of my RRSP in U.S. dollars? I got burned in the past couple of years by holding U.S. Equity funds in Canadian dollars in my non-registered account. Even though the underlying stocks in the funds made money, I still got a negative return because of the currency effect. I want exposure to the U.S. stock market but I just don't want to take on the currency risk. Expert Answer:
Normally you cannot hold U.S.-dollar investments in an RRSP, although some U.S. money market funds denominated in U.S. dollars are RRSP-eligible. In any case, as a Canadian, even if you hold investments directly in U.S. dollars, you still face the same currency risk because you will ultimately have to convert these investments back into Canadian dollars (unless you plan to retire in the States).
A better alternative for your RRSP, if you believe the greenback will continue to depreciate against the loonie, would be to look into U.S. Equity funds that actively hedge their currency exposure or derivatives-based RRSP clones of U.S. equity funds. These funds' returns will be very close to the "pure" returns of their underlying holdings because their managers use derivatives to eliminate the effects of currency conversion. Unfortunately there is no easy way to tell which funds use hedging techniques and to what extent, so you may have to contact the fund companies directly to find out.
The flip side of this strategy is that while it can dramatically help your returns when the U.S. dollar loses value, it can just as easily have the opposite effect if the U.S. dollar appreciates. Because currency exchange rates are very hard if not impossible to predict accurately, most managers of U.S. equity funds do not hedge their currency exposure. Also, keep in mind that even though it doesn't always work in your favour, exposure to the greenback can be an important element of diversification for Canadian investors.
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No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
