Whether to hold US stocks in Canadian or US dollars

The American dollar is drifting down to multi-year lows in response to President Donald Trump’s desire to push interest rates and the currency down.

Lower rates and a weaker currency go hand in hand. If the Federal Reserve cuts rates, government bonds pay less interest and so there is less of an incentive for investors to hold them. Money flows into other currencies and the dollar heads lower.

While that’s good for American exports which become cheaper in other currencies, it actually makes American’s poorer. It takes more dollars to buy imported goods which is something Americans have been noticing when they go shopping.

Since Trump’s election the US dollar is down almost 7% against a basket of global currencies. Surprisingly, given his relentless trade pressure on Canada, the Canadian dollar has also appreciated. It is roughly 3% stronger today against the greenback then when he was elected.

A recurring question from readers is what to do when it comes to US investments. Many Canadians own US stocks and wonder whether it is better to hold those stocks in a US dollar account or convert the shares into Canadian funds.

The answer is that it really doesn’t matter. The preference for one over the other is the way you expect the currencies to move. If you hold a US stock in Canadian dollars and the Canadian dollar strengthens – as it has – the Canadian equivalent of your holdings is worth less in US terms. If the US dollar rises, the Canadian equivalent is worth that much more.

Otherwise, the returns are the same when adjusted for exchanges rates, fees paid on converting and the movement in the stock. The only difference is the timing of when you pay the fees. Now or later.

If you travel back and forth frequently, or own US property and pay US bills, that’s one reason to hold the shares in US dollars. You can sell them and have the money deposited into a US dollar account at your Canadian bank. That avoids exchange rates and conversion fees. Dividends can also be sent to a US dollar account dollar-for-dollar.

There are various strategies that go along with the decision, including which accounts to use to hold the shares. Tax sheltered one like RRSPs are better because of the tax treatment of dividends. ETFs that hold US stocks are another way to simplify the fees.  

Ultimately, it’s a matter of choice.

Here are three links with more information to help with your decision: A Moneysense article offers an overview of the pros and cons. The Globe & Mail looked at strategies for investing in US stocks based on reader questions. The Successful Investor has a similar treatment with examples.