XIN & XSP to Hedge the LoonieVote today likely to pass
Financial Post, Richard Morrison, Tuesday, November 15, 2005
For Canadian investors who've seen their U.S.-dollar denominated holdings shrink in value as the loonie has climbed over the past few years, Barclays Global Investors appears to have some good news: It plans to hedge the Canadian dollar in the two iUnits exchange-traded funds that cover the United States and the rest of the world.
The iUnits S&P 500 Index RSP Fund (XSP/TSX) and the iUnits MSCI International Equity Index RSP Fund (XIN/TSX) had been designed when the foreign content limit was in effect for RRSPs. To that end, Barclays, like many other issuers of foreign "clone" funds, used futures contracts and other derivatives to replicate the respective indexes without actually holding foreign securities. Since there is no need for that now, Barclays says it will simply hold the respective iShares (the U.S. equivalent of iUnits) and hedge the currency.
At a meeting set for today, unitholders will vote on the changes. "We've gotten a lot of very good feedback on the proposals so far, so I think they'll pass," said Geri James, head of Canadian exchange-traded funds at Barclays Global.
Had such hedging been in place over the last three years, total returns for both funds would have been dramatically higher, the Barclays notice to unitholders shows.
Holders of the S&P 500 ETF, for example, had a total return of 5.2% over the past three years, but that would have been 17.4% had the fund been hedged against the falling U.S. dollar. Over the past year, S&P 500 index holders were ahead just 2.9% -- a gain that would have been 11.7% in a hedged fund.
Similarly, the MSCI EAFE index fund, with a total return of 12.3% over the past three years, would have generated a three-year total return of 18.7% had it been hedged to Canadian dollars. Over the past year, the fund had a total return of 15.5%, but that respectable number would have been 28.1% had the fund been hedged.
The fund fees will change. Barclays plans to cut the annual trustee fees on the funds, to 0.15% of net asset value from 0.3% for the S&P, and to 0.15% from 0.35%. But an additional iShares fee will bring the total fees on the S&P 500 tracking ETF to 0.24%, and to 0.50% for the MSCI EAFE index fund.
Unhedged versions of the funds won't be available, but Canadians seeking U.S.-dollar-denominated ETFs have plenty of U.S.-based funds to choose from, Ms. James said.
"We're not making a call on the dollar," she said, adding the proposal doesn't reflect anybody's idea that the loonie might rise or fall. "We're just adding flexibility and choice."
© National Post 2005