What is Currency-Hedged ETF?

Example

Vanguard offers two versions of the same U.S. equity ETF:

• VFV.TO — unhedged: your returns include gains or losses from the USD/CAD exchange rate
• VSP.TO — hedged: U.S. dollar fluctuations are neutralized

If the Canadian dollar moves from 0.73 to 0.78 USD, VFV.TO would lose about 6% of its value in CAD due to currency alone, even if the S&P 500 didn't move. VSP.TO would be unaffected.

Why It Matters

Currency hedging is neither good nor bad — it depends on your time horizon. In the short term (< 5 years), hedging reduces volatility. Over the long term, currency fluctuations tend to cancel out, and hedging has a cost (slightly higher MER). Most All-in-One ETFs like VGRO.TO hedge the bond portion but not equities.