Do you want to hold assets in U.S. dollars or earn income in U.S. dollars? Or, do you travel or stay in the U.S. often? If so, you may be interested in U.S. dollar- (US$) mutual funds.
Investors can use U.S. dollars to pay for mutual funds with a US$ purchase option. Distributions and redemptions are all paid in U.S. dollars.
1. The fund invests your U.S. dollars in US$-denominated securities
For example, let’s say you invest US$500 into a U.S. dividend fund. The fund manager could then use this money to buy Apple shares on a U.S. exchange in U.S. dollars.2. The fund invests your U.S. dollars in non-US$ denominated securities.
For example, let’s say you in invest US$200 in an international equity fund. The fund manager could then purchase shares of Burberry on the London Stock Exchange in British pounds.The distinction above is important because with option one, your currency exposure is only to the U.S. dollar. But in option two, you’re exposed to multiple currencies based on the securities in which the fund invests.
When choosing between the two, remember that while exchange rates fluctuate year to year, the impact of currency on investment returns declines over the long term. So, it’s not about which type of fund will perform better. Rather, focus on what risks you, as an investor, want exposure to.
Speaking with an advisor to understand how a particular fund’s currency exposure is managed is an important step to help you figure out what risks you bear by investing in that fund.
Why is the C$ unit price different from the US$ unit price?
The US$ fund unit price equals the C$ unit price multiplied by the US$/C$ exchange rate.
Why do C$ funds and US$ funds have different returns?
The difference in unit prices reflects the fact that the US$ fund unit price = C$ unit price multiplied by the US$/C$ exchange rate. If the US$/C$ exchange rate changes during the period measured, then returns will differ.
- If the Canadian dollar strengthens relative to the U.S. dollar, the return of the US$ fund would be higher than the C$ fund.
- If the Canadian dollar weakens relative to the U.S. dollar, the return of the US$ fund would be lower than the C$ fund.
| Type of fund | Exchange rate change | Effect on returns |
|---|---|---|
| US$ | No change | Returns of C$ and US$ funds would be the same |
| US$ | C$ appreciates vs. US$ | Return of US$ fund would be higher than C$ fund: investor receives more in US$ when they sell |
| US$ | C$ declines vs. US$ | Return of US$ fund would be lower than C$ fund: investor receives less in US$ when they sell |
What impact does buying a US$ fund have on tax reporting?
For Canadian income taxes, all transactions must be reported in Canadian dollars. Any US$ distributions paid to you will be expressed on your tax slip in C$ at a designated exchange rate. Your tax slip will indicate the exchange rate used for the tax calculation.