How to Invest in U.S. Stocks When the Canadian Dollar Is Weak

Here’s how you can invest in U.S. stocks while the loonie is weak and manage how exchange rates affect your costs and returns.

Daniel Da Costa

Author Bio Daniel joined The Motley Fool Canada in 2019 and brings experience in banking, investing, and financial analysis. Growing up as the son of a proprietary stock trader and educator, he developed an early interest in financial markets and a passion for helping Canadians improve their financial well-being. His work spans investment research, economic analysis, and econometric modelling, with a focus on understanding the broader forces that influence businesses, markets, and the economy. As an investor, Daniel looks for high-quality businesses with long-term growth potential, reliable income, and attractive valuations. Outside of finance, Daniel enjoys spending time with his family, playing hockey, running, and sailing. Areas of Expertise Investment research, economic analysis, econometric modelling, banking, financial analysis, business fundamentals, long-term investing, dividend investing, and company valuation. Favorite Investment Quote "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." — Warren Buffett

Published October 30, 9:00 pm EDT

If you’re looking to invest in U.S. stocks, one thing that’s easy to overlook is how much the exchange rate can affect both the cost of buying shares and the returns you eventually earn, whether the Canadian dollar is weak or strong.

And with the loonie trading around US$0.71, converting your savings gets you considerably fewer U.S. dollars than it would at par, so it’s understandable why some Canadians would rather wait for a better exchange rate before buying.

However, the U.S. market has a tonne of high-quality businesses with significant long-term growth potential, and waiting for the dollar to recover could mean watching those stocks continue growing without you.

Furthermore, currency movements don’t stop mattering once you’ve invested. Even if your U.S. stocks rise in value, a strengthening Canadian dollar can offset some of those gains when your returns are measured in Canadian dollars.

Fortunately, you don’t need to convert all your cash at once, and there are ways to gain exposure to American businesses without exchanging your money yourself.

So, whether you’re looking to buy a broad index fund or an individual growth stock like Amazon (NASDAQ: AMZN), here’s what to consider when investing while the Canadian dollar is weak.

Paper Canadian currency of various denominations — Source: Getty Images

You don’t need perfect timing to buy U.S. stocks

One of the simplest ways to invest when you’re concerned about the dollar is to spread your purchases over time. That allows you to start building exposure today while leaving room to keep adding, rather than converting all your savings at one exchange rate.

Plus, by investing consistently, you also have opportunities to buy more shares when the stocks themselves become cheaper.

And while currency movements can affect your returns, they don’t always have to work against you.

For example, if you own U.S. stocks directly and the loonie weakens further, those shares become worth more in Canadian dollars, even if their U.S. share prices remain unchanged. On the other hand, if the Canadian dollar strengthens, the opposite happens.

That currency exposure can also help diversify your portfolio, especially if most of your savings, income and other investments are already tied to Canada.

Furthermore, if you’re buying American shares directly, it’s worth comparing the currency-conversion fees different brokerages charge.

Using a U.S.-dollar account also allows you to keep sale proceeds in that currency to reinvest. That not only reduces conversion fees but also lets you buy and sell U.S. stocks without having to make a currency-conversion decision with every trade, something that shouldn’t be overlooked.

Canadian-listed investments give you even more options

Another straightforward option many Canadians may prefer is buying U.S. stocks through a Canadian-listed ETF, without having to convert their savings themselves.

For example, the iShares Core S&P 500 Index ETF (TSX: XUS) gives you exposure to roughly 500 of the largest American companies and trades in Canadian dollars on the TSX.

However, buying it in Canadian dollars doesn’t eliminate the effect of exchange-rate movements on your returns, which is why BlackRock also offers the iShares Core S&P 500 Index ETF (CAD-Hedged) (TSX: XSP). It gives you the same exposure but uses currency hedging to reduce that impact.

So, if you’re concerned about the loonie strengthening in the coming years, XSP lets you own the same American businesses while reducing the impact that currency movements can have on your returns.

And you can take a similar approach with individual stocks. For example, Amazon’s Canadian depositary receipt trades in Canadian dollars, represents a fractional interest in its U.S.-listed shares and includes a built-in currency hedge, although that convenience comes with an ongoing cost.

After all, Amazon isn’t just an online retailer. Its cloud business, Amazon Web Services, is one of the biggest beneficiaries of the AI boom, and its advertising business continues to grow rapidly, giving it several long-term growth engines.

So, with several ways to manage your currency exposure, a weak Canadian dollar doesn’t have to stop you from buying high-quality U.S. stocks like Amazon and giving those businesses years to grow your hard-earned capital.