Impact of Exchange Rates

How Exchange Rates Affect Foreign Mutual Fund Returns

The impact of exchange rate movements (also known as currency risk or exchange rate risk) applies when you purchase mutual funds that hold foreign securities such as U.S. stocks.

Canadian investors typically purchase U.S. mutual funds using Canadian dollars, but in order to buy U.S. stocks and bonds, fund managers first have to convert this money into U.S. dollars.

The chart below highlights the short-term effects of exchange rate movements. Since the end of 2002, the rising Canadian dollar sharply reduced the cost of U.S. items.

It's important to note that most mutual fund unit prices and their rates of return are reported in Canadian dollars, even if it is a foreign fund. As an example, consider the impact that currency can have on a stock's overall rate of return:

Because mutual funds are valued in Canadian dollars, with all things being equal, when the Canadian dollar rises, the value of a U.S. investment falls (in Canadian dollar terms). Conversely, if the Canadian dollar declines, the value of the U.S. investment rises.

Exchange Rates Vary Over Time

In addition to impacting performance from one year to the next, exchange rate movements tend to vary over time. While a rising Canadian dollar has negatively impacted Canadian investors holding U.S. dollar investments since 2003 (despite strong gains in the U.S. stock market), the opposite effect occurred throughout most of the 1990s. (As the U.S. dollar increased relative to the Canadian dollar during the 1990s, the value of U.S. mutual funds increased when converted back into Canadian dollars.)

The impact of currency movements from year to year can be seen below:

DIFFERENCES BETWEEN CANADIAN AND U.S. INVESTOR RETURNS Based on U.S. Stock Market Performance (S&P 500 Index)

Exchange Rates Have Less Impact over the Long Term

The example above highlights the variability in short-term exchange rate movements and the impact this can have on investment returns. However, the chart below shows how currency movements tend to have minimal impact over the long term. In fact, over periods of 10 years or longer, the impact of exchange rates between the Canadian dollar and the U.S. dollar on investment returns gets closer and closer to zero-an important point for long-term investors.

MINIMIZING CURRENCY IMPACT OVER TIME Based on U.S. Stock Market Performance AT December 31, 2005 (S&P 500 Index)

Learn more about the impact of currency movements and exchange rates on your investments:

• How Currency Hedging Works
• Key Principles Related to Foreign Currency Movements

The information contained on this web page is compiled from sources believed to be reliable, but no representation or warranty, expressed or implied, is made to its accuracy. All opinions contained on this web page are current to September 30, 2006 are subject to change without notice and are provided in good faith without legal responsibility. Please consult your advisor and read the prospectus before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds are offered by RBC Asset Management Inc. and distributed through authorized dealers.