A Canadian investor holds a basket of international bonds via a USD-denominated ETF. They are concerned about potential weakness in the USD relative to the CAD, which could erode their returns when converting back to CAD. What would be the most effective strategy to mitigate this specific currency risk?

Question: A Canadian investor holds a basket of international bonds via a USD-denominated ETF. They are concerned about potential weakness in the USD relative to the CAD, which could erode their returns when converting back to CAD. What would be the most effective strategy to mitigate this specific currency risk?

Answer options:

• Invest in a CAD-denominated international bond ETF without hedging. ✅ Invest in a currency-hedged version of the USD-denominated ETF.
• Increase their exposure to Canadian real estate.
• Diversify into more US equity ETFs.

Correct answer: Invest in a currency-hedged version of the USD-denominated ETF.

Explanation: To mitigate the risk of USD weakness eroding returns from a USD-denominated asset, investing in a currency-hedged version of the ETF is the most direct and effective strategy, as it aims to neutralize the currency exposure.