How Currency Movements Affect Your VEQT Returns

When VEQT Doesn't Match the Headlines

You check your portfolio. The S&P 500 is up 1% today. But VEQT is flat — or even slightly red. Nothing is broken. The culprit is almost always the same: the Canadian dollar strengthened against the US dollar.

This confuses a lot of VEQT holders, and it's worth understanding why it happens and why it doesn't matter as much as you think.

How Currency Exposure Works in VEQT

VEQT holds stocks in the US, Europe, Asia, and emerging markets — all denominated in foreign currencies. The US portion (~40%) is in USD. The international developed portion (~23%) is in EUR, JPY, GBP, and others. Emerging markets (~7%) are in various local currencies.

When you own VEQT in a Canadian brokerage account, the returns you see are translated back into Canadian dollars. This translation creates currency exposure.

Here's the mechanics: if a US stock goes up 2% in USD terms, but the Canadian dollar also strengthens 2% against the USD, your return in CAD is roughly zero. The stock gain is fully offset by the currency move. You made money in US dollar terms, but when converted back to Canadian dollars, it evaporates.

The reverse works in your favor. When the Canadian dollar weakens against the USD, your US holdings are worth more in CAD terms — you get a currency tailwind even if the underlying stocks are flat.

Only the Canadian equity portion of VEQT (~30%) is immune to this dynamic. The other ~70% moves with both the underlying stock prices and the exchange rates.

Why Vanguard Doesn't Hedge the Currency

Currency hedging means using financial instruments (typically forward contracts) to neutralize the effect of exchange rate changes. Some ETFs do this — you'll see "hedged" or "CAD-hedged" in their names.

Vanguard deliberately does not hedge VEQT's equity exposure. This is a considered decision backed by academic research, not an oversight. The reasons:

Over long horizons, currency effects tend to wash out. The CAD/USD exchange rate fluctuates in cycles. Over 20+ years, the net impact of currency on your equity returns has historically been modest compared to the equity returns themselves. Hedging eliminates short-term noise that doesn't significantly affect your destination.

Hedging has a direct cost. Currency forward contracts aren't free. The hedging cost depends on the interest rate differential between Canada and the foreign country, and typically runs 0.2-0.5% per year. This cost directly reduces your returns, every year, guaranteed — to protect against a risk that may or may not materialize.

Unhedged foreign currency provides diversification. This is the counterintuitive part. When the Canadian economy weakens (oil prices drop, trade disputes flare up), the Canadian dollar typically weakens too. This means your foreign holdings automatically become worth more in CAD terms, cushioning the blow. Currency exposure acts as a natural hedge against Canadian economic risk. Hedging away the currency removes this cushion.

For bonds, it's different. VGRO hedges its bond allocation because currency swings can overwhelm the small, predictable returns of fixed income. A 5% currency move on a bond returning 3% dominates the return. For equities returning 7-10% over time, currency is a smaller proportion of the total.

When Currency Moves Feel Bad

In any given week or month, currency can dominate your VEQT returns. Some examples of what this looks like:

• S&P 500 up 1.5%, VEQT up 0.3%: The CAD strengthened against the USD, eating most of the US equity gains.
• Global markets flat, VEQT down 1%: The CAD rallied. Your stocks didn't move but they're worth less in Canadian dollar terms.
• US market down 2%, VEQT down 1%: A weakening CAD partially cushioned the equity decline.

These daily and weekly mismatches are normal and expected. They can be confusing if you're comparing VEQT's return to the S&P 500 or other benchmarks quoted in USD. You're comparing apples (CAD returns) to oranges (USD returns).

Zoom Out

Over the past 5, 10, and 20 years, the cumulative currency effect on globally diversified equity portfolios has been meaningful in some periods but modest relative to equity returns. The Canadian dollar has had stretches of strength (2003-2007, 2009-2011) and weakness (2013-2016, 2018-2020). These cycles don't trend in one direction permanently.

If you check VEQT's return in USD instead of CAD, you'd see different daily numbers but the same long-term wealth accumulation trajectory. The currency lens you view through changes the short-term appearance but not the underlying value of the businesses you own.

When Currency Exposure Might Matter

There are legitimate situations where currency is worth thinking about:

You plan to spend in a foreign currency. If you're retiring to Portugal or planning extended time in the US, exposure to EUR or USD is actually desirable — it hedges your future spending.

You need the money within 1-3 years. Short time horizons don't give currency fluctuations time to wash out. But if you're in VEQT with a 1-3 year horizon, currency risk is the least of your problems — equity risk is the bigger concern.

You want to reduce volatility specifically from currency. Some investors prefer the hedged versions of their international ETFs. This is a valid preference, but it means managing multiple ETFs instead of one, paying the hedging cost, and losing the diversification benefit of currency exposure. Most passive investors conclude the tradeoff isn't worth it.

The Practical Takeaway

Don't compare VEQT's daily return to the S&P 500 and panic when they don't match. Different currency, different basket of stocks, different result on any given day.

If your VEQT is flat or slightly down on a day when you expected it to be up, check the CAD/USD exchange rate. A strengthening Canadian dollar is almost certainly the explanation. It's not a problem to solve — it's a feature of owning a globally diversified portfolio denominated in your home currency.

Over your investing lifetime, the equity returns will dominate. The currency noise fades. Vanguard's choice not to hedge is deliberate, evidence-based, and saves you money every year.

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This article is for informational purposes only and is not financial advice.