A client is considering an ETF that tracks the S&P 500 Index, but with a Canadian dollar hedging overlay. The client understands that the ETF's CAD-hedged performance will differ from the unhedged S&P 500 in CAD. If the Canadian dollar significantly strengthens against the U.S. dollar over a quarter, how would the performance of this CAD-hedged S&P 500 ETF likely compare to a similar unhedged S&P 500 ETF for a Canadian investor? A. The hedged ETF would likely outperform the unhedged ETF. B. The hedged ETF would likely underperform the unhedged ETF. C. The performance would be identical, as currency movements are nullified by hedging. D. The hedged ETF's performance would be unaffected by currency movements, unlike the unhedged ETF.

Question: A client is considering an ETF that tracks the S&P 500 Index, but with a Canadian dollar hedging overlay. The client understands that the ETF's CAD-hedged performance will differ from the unhedged S&P 500 in CAD. If the Canadian dollar significantly strengthens against the U.S. dollar over a quarter, how would the performance of this CAD-hedged S&P 500 ETF likely compare to a similar unhedged S&P 500 ETF for a Canadian investor?

A. The hedged ETF would likely outperform the unhedged ETF. B. The hedged ETF would likely underperform the unhedged ETF. C. The performance would be identical, as currency movements are nullified by hedging. D. The hedged ETF's performance would be unaffected by currency movements, unlike the unhedged ETF.

Answer options: ✅ A. The hedged ETF would likely outperform the unhedged ETF.

• B. The hedged ETF would likely underperform the unhedged ETF.
• C. The performance would be identical, as currency movements are nullified by hedging.
• D. The hedged ETF's performance would be unaffected by currency movements, unlike the unhedged ETF.

Correct answer: A. The hedged ETF would likely outperform the unhedged ETF.

Explanation: When the Canadian dollar strengthens against the U.S. dollar, an unhedged S&P 500 ETF's returns (in USD) translate into fewer CAD, reducing its performance for a Canadian investor. A CAD-hedged ETF aims to mitigate this currency impact, so its performance would be less negatively affected by the strengthening CAD, leading to relative outperformance compared to an unhedged ETF in this scenario.