Currency-Hedged U.S. Equity ETFs Outperformed Over 18 Months: What That Reveals About Your Strategy
Over the past 18 months, hedged U.S. equity ETFs beat their unhedged equivalents for Canadian investors. That outcome wasn't obvious in advance. The CAD strengthened against the USD through much of 2024 and early 2025, turning what's usually a drag, the cost of rolling forward contracts to neutralize currency moves, into a win. The loonie rose from roughly 1.39 to around 1.31 per USD. For a Canadian holding unhedged U.S. stocks, that appreciation eroded returns. For someone holding the hedged version, the forward contracts offset the loss.
The interesting question isn't whether hedged products won during that window. They did. The question is what that 18-month result tells you about whether hedging belongs in your allocation going forward.
The Mechanics Aren't Debatable
Unhedged means you own the asset and the currency. A Toronto investor holding an unhedged S&P 500 ETF gets two return streams: the index performance in USD, and the CAD/USD exchange rate movement. If the S&P is up 12% and the CAD strengthens 4%, the investor's return is roughly 8%. Hedged products use forward contracts to strip out that second stream. You get the index, minus the cost of maintaining the hedge, which in normal conditions runs about 0.05% to 0.15% per year in higher MER.
The cost isn't fixed. It fluctuates with the interest rate differential between the Bank of Canada and the Federal Reserve. When the BoC rate sits below the Fed's, hedging gets expensive because the forward contract embeds that gap. When the BoC rate is higher, the cost can shrink or even reverse into a small gain. From mid-2023 through late 2024, rates diverged enough that hedging costs stayed low. That set the stage for hedged products to outperform when the CAD rallied.
Where the Strategic Question Lives
Most investors treat currency hedging as a yes-or-no decision: hedge everything or hedge nothing. The framing is backwards. The real decision is about the correlation between your domestic economy and the USD. The Canadian dollar moves with commodity prices, particularly oil. When oil climbs, the CAD tends to strengthen. When global risk appetite falls, investors pile into USD as a safe haven, and the CAD weakens.
That dynamic matters if you hold a concentrated portfolio of Canadian energy or resource stocks. Your domestic equity already has implicit long-CAD exposure. Adding unhedged U.S. equities gives you a natural offset: when Canadian resource stocks lag because commodity prices are soft and the CAD is weak, your U.S. holdings benefit from the currency move. Hedging that away removes the diversification effect.
For an investor with little commodity exposure, someone working in tech or professional services with most wealth in real estate and broad Canadian equity, the calculus flips. You're already long CAD through your salary and property. Adding unhedged U.S. equity doubles down on the same currency without adding structural balance. Hedging makes sense not because it's always better, but because it reduces total portfolio sensitivity to a single exchange rate.
The 18-Month Win Is Noise, Not Signal
Hedged products outperformed because the CAD appreciated. That's the entire explanation. If the loonie had weakened instead, unhedged would have won by roughly the same margin. A result that depends entirely on one variable over one short window reveals nothing about long-term expected returns.
The CAD has traded between 1.20 and 1.45 per USD for most of the last decade. Over a 20-year holding period, the currency cycles average out. A 2019 Vanguard study found that for Canadian investors holding U.S. equities from 1990 through 2018, the choice to hedge or not hedge the equity portion made less than 30 basis points difference in annualized returns. What didn't average out was the volatility. Unhedged portfolios had wider year-to-year swings.
The decision isn't about picking the higher-returning version. It's about whether you want currency volatility in your portfolio or not. If you're retired and drawing from the portfolio in CAD, that volatility shows up as sequence risk: a weak CAD year can force larger drawdowns in fund units to meet spending needs. If you're 38 and accumulating, the volatility is just numbers on a screen. You can ignore it.
Most Canadian investors hedge too little or hedge reactively, adding hedged products after the CAD has already appreciated and they've locked in the disadvantageous rate. The better approach: decide based on your balance sheet, not the last 18 months.
