Wall Street stocks: How to protect your portfolio from a falling U.S. dollar

The U.S. dollar is down 22% against the Canadian dollar so far this year. Many investors fear it will keep falling.

If you knew the U.S. dollar would keep falling, the best strategy would be to sell all of your U.S. stocks and buy them back when the dollar stabilizes. However, you don’t know where the U.S./Canada exchange rate is going next — you never do.

Wall Street stocks give you opportunities that just aren’t available in Canada

Rather than try to predict currency fluctuations, we continue to recommend that you maintain a reasonable portion of your portfolio in well-established U.S. companies, like those we recommend in our Wall Street Stock Forecaster newsletter.

We see exposure to the U.S. dollar as a valuable form of geographic diversification. As well, if you stay out of the U.S. market, you’ll miss out on major multinational opportunities that aren’t available anywhere else. Moreover, many U.S. firms are unique world leaders. They simply don’t exist in any other country or market.

That’s especially true of major Wall Street stocks like McDonald’s Corp. (symbol MCD on New York) and Apple (symbol AAPL on Nasdaq), both of which we regularly update in Wall Street Stock Forecaster.

Both have large overseas operations, including emerging markets like China and India. That gives them a built-in hedge against a low U.S. dollar, because a low dollar increases the contribution of their operations outside of the U.S.

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Here’s an exchange-traded fund that accounts for currency fluctuations

The iShares CDN S&P 500 Hedged Index Fund (symbol XSP on Toronto) has appeal if you want to invest in U.S. stocks, but don’t want exposure to the U.S. dollar. As we mentioned earlier, we advise maintaining your U.S. dollar exposure to give your portfolio additional geographic diversification. Even so, we recently looked at the fund in our Inner Circle service.

The iShares CDN S&P 500 Hedged Index Fund is hedged against movements of the U.S. dollar against the Canadian dollar, so its value rises and falls solely with the stocks in its portfolio.

The fund holds the stocks in the S&P 500 index, which is made up of 500 major U.S. stocks chosen for market size, liquidity, and industry group representation.

The 10 highest weighted Wall Street stocks on the index are Exxon Mobil, General Electric, Bank of America, JP Morgan Chase, Microsoft, AT&T, IBM, Chevron Corp., Johnson & Johnson and Procter & Gamble.

Expenses on the units are just 0.15% of assets, plus an added 0.09% for the cost of currency hedges, for a total of 0.24%.

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