Listener Question: Hedged or Non-Hedged Funds?

You have questions, we have answers. In today's episode of MarketFoolery, host Chris Hill and analyst Jason Moser dive into the mailbag. How can you choose between two similar ETFs? What's the difference between a hedged and a non-hedged ETF, and which is the better bet? What does "forward earnings" mean, and is it really a good metric for investors to count on? What the heck was Verizon (VZ 0.86%) thinking with the whole Oath thing? Also, Jason weighs in on the tragic fate of Bojangles (BOJA), the Southeastern chicken chain that struggled for years before exiting the public markets recently. Tune in to hear more.

A full transcript follows the video.

This video was recorded on Nov. 6, 2018.

Chris Hill: It's Thursday, November 8th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio, Jason Moser. Thanks for being here!

Jason Moser: Howdy!

Hill: Foolapalooza continues. Again, we're taping this little earlier in the week, so we will not be talking about the news of the day. We will, however, be dipping into the Fool mailbag. I shouldn't say it's an all-mailbag episode. We have one timely story from this week that I want you to weigh in on.

Moser: Maybe we should take a stab at what the news of the day perhaps will be. That could be an end-of-the-show, let's take a stab at it, and wherever the chips fall, that's where they fall.

Hill: I think on Thursday, one of the news stories is going to be "Disney is reporting earnings tonight. What do we think it's going to be?" And we'll hit that on Motley Fool Money on Friday.

Moser: Yeah, we'll have a lot of good stuff for the radio show this week.

Hill: Our email address is [email protected]. Drop us an email, would you? For crying out loud, we're lonely. Also, we like questions about stocks and investing. [email protected].

Question from longtime listener, Gary Carr in Rome. Rome!

Moser: What's he doing in Rome? I see tweets from Gary.

Hill: He's having an amazing time. If you're in Rome, you're having an amazing time. 

Moser: It's a beautiful place.

Hill: You're living the life. That's what Gary's doing. Here's Gary's question. "I frequently hear a Foolish analyst talk about a stock or company trading at a multiple of 'forward earnings.' I assume a factor in this calculation is a company's guidance for the future. Can someone please explain how this is calculated, and why it's a reliable indicator for the performance of a business?" Great question.

Moser: It is. We use that metric from time to time. The real answer here is that ultimately, it's just another tool in the toolbox. As investors, we like to be able to look at these businesses and the stock's valuations from as many different perspectives as we can. That gives us more to go on to be able to make judgments there. Typically, when you talk about PE, the price to earnings ratio, that's calculated using the trailing 12 months' earnings. You take the price of the stock in relation to the trailing 12 months of the company's earnings. With forward earnings, as you may understand, it's taking a look at the forward picture. And oftentimes, it's utilizing the company's own guidance in what they're projecting for the coming year. Sometimes companies don't like to offer a lot of guidance, so we can go on projections from Wall Street analysts. A lot of times, you'll get those estimates, and they'll come up with a consensus and average it out. But ultimately, what this does, it gives us one more way to look at the value of the stock. We know that the market is forward-looking. If we can get an idea of how the market is viewing the stock today, based on the potential for the earnings in the coming 12 months, that's another perspective. 

I'll also say that when companies issue that guidance themselves, we can look at that forward guidance and compare it to, historically, what they've done, whether they've hit that guidance, whether they typically miss that guidance. Then you can get a better idea of where that stock may be sitting at that time. It can be helpful.

Hill: It's one of those things that involves a little bit more work on the part of the investor. But I like trusting the management of the companies that I own shares of. That, to me, is one more good way to figure out, how trustworthy are these people? How good is their track record? How good are they at this type of thing? I don't know about you, but for me, I always prefer the under-promise, over-deliver. I always prefer to be cautious. There's virtually no upside to, "You know what we're going to do in the next 12 months? We're going to crush it."

Moser: And typically, those companies are weeded out pretty quickly. If we see those companies that don't do a very good job of managing those expectations, and they tend to over-promise and under-deliver, we identify them very quickly. The market weeds them out. I agree with you, I'd rather see a company go ahead and under-promise and over-deliver. And a lot of times, you get a better sense of how familiar management is with the business and what they're trying to do based on that track record. If we look beyond something like forward earnings, Netflix is a really good example of a company where, quarter in and quarter out, they do a pretty phenomenal job of targeting those subscriber additions. That's something based on what they know about that business. There's a lot that goes on there that we don't know about. That's one of the reasons why the business is so successful. They know what they're doing with a lot of that data. They've been very reliable, only missing that number on occasion. Now, when it misses that number, the market tends to punish the stock. But for the most part, they hit that number or often exceed it. That's one of the reasons why the market has given the stock a lot of credit. They see the rosy future that exists for that company based on a lot of what they've done in the past.

Hill: Question from Liam Beck in Canada. It's shaping up to be an all-international email bag.

Moser: We're global here. We're worldly people.

Hill: And we don't just have dozens of listeners here in the U.S. It's around the world. Liam writes, "I'm a relatively new young investor, 21 years old, but actively invest in U.S. equities. I recently took a look at my mom's portfolio." Whoa, Liam. I hope your mom asked you to. I hope you didn't just hack her computer or something. "I recently took a look at my mom's portfolio and noticed she was in a mutual fund with total fees up to 4.5%." Yikes. "It's obviously eating away at her returns. I'm going to help her invest in ETFs. My question is, would it be more beneficial to invest a portion in the Vanguard VFV or VSP?" Please explain those for the listeners, as you did for me before we started taping this.

Moser: You know, I just got a question on Twitter. Someone direct messaged me on twitter named Liam. It fits this guy's age group here. He was asking me about Teladoc. Now, I'm not going to go into that answer, but I wonder if this is the same Liam. If so, thanks for the question.

This is an interesting situation here. It goes back to the basic concept of ETFs, exchange-traded funds. We like those, they're a great way to invest. You can get broad exposure, nice diversity, and it can help give investors a way to de-risk investing in stocks.

Hill: Also, with ETFs -- not to knock on mutual funds, but with mutual funds, there's a $2,000 or $3,000 minimum buy as part of the purchase.

Moser: ETFs are basically like buying a stock. It's just a more diversified holding. When we're talking about these two funds, the VSP versus the VFV, these are funds that seek to track the S&P 500 Index, very similar to what we talk about here in your basic Vanguard S&P Index funds, except these two funds are Canadian funds. There's a little bit of a difference between the two. They are essentially the same with the one difference being that the VSP hedges its currency exposure to the Canadian dollar. That's the only difference. So then, it becomes a matter of, how important to you is hedging? 

Hill: So, it's basically, I've got these two funds. One is hedged, one is not.

Moser: Exactly. One is hedged, one is not. Typically, hedging involves some form of expense. There's a cost involved with doing that. As you'll hear, on Market Foolery, on Motley Fool Money, we often talk about currency effects, we talk about these quarterly reports, and we talk about the revenue growth. And we'll talk about revenue growth ex-currency effects. And the reason why we do that is because we take a longer view, I think, than a lot of Wall Street investment firms. Typically, we don't pay as much attention to those currency effects. #1, they're very difficult to predict. Also, #2, they tend to ebb and flow. The longer that your timeline goes, that the less material they are, the less you should worry about it. It's very difficult to predict in any way currency effects may be ten years from now, but a great business is going to be a great business. If you have a business that's worrying about some currency effects, that's OK, because that means it's making a lot of money in a lot of different places. 

For me, it boils down to looking at the performance of the two funds to get a better idea of whether one materially outperformed the other. Looking at these two together in Capital IQ here, it's very clear that the VSP fund has underperformed the VFV over the course of the past ten years. The VFV fund has been the better performer by a long shot. The VFV fund is the non-hedged. To me, that shows that, it's in line with our general philosophy -- I wouldn't really worry too much about the hedging side of things. It's not that it's a bad way to do it, but we just believe that the longer that your investing timeline is, the less material it is to what you need to be considering. So, if I was going to recommend one of the two based on historical track record, I would go VFV I think that the S&P 500 is a great way to invest anytime you're trying to mirror that index. I'm a big fan, and I do own shares of an S&P Index fund in my 401(k). Great way to invest. You're probably not going to do poorly either way, but I would probably go the non-hedged way, if it was me personally.

Hill: Great point by Liam, as young as he is, recognizing what fees can do to your returns. That's one of the reasons we love Vanguard. They have really low fees. 

Moser: Yeah. Make sure your mom hears this episode, Liam. Clearly, you're looking out for her. When you've got a kid that's trying to save you money ... not all mothers are so lucky. I hope she realizes she's got a good son looking out for her.

Hill: She raised him, right.

Before we get to our final email, the news of the week -- and I had Matt Argersinger here in the studio to talk about this, but you were the person I immediately thought of, and clearly some of the listeners did based on what I saw on Twitter. Bojangles! The Jangler, being taken private! Not a shock to you.

Moser: No, not a shock at all, I mean. We had an episode of Market Foolery back on August 27th. I went back and looked this up and confirmed my notes from this. We had talked about a few different big picture topics. One of them was, "let's make a deal." And my argument at the time was that Wendy's should buy Bojangles. I thought it would give them great exposure to the lucrative chicken market. Let's face it, that chicken market is lucrative. You've got KFC out there winning a lot of dollars for Yum!, Chick-Fil-A making a mint on its own, and Popeye's is now part of Restaurant Brands. For me, that would have been a really ideal way for Wendy's to add some of that chicken power. And they could have done it with an all-stock deal with their share at recent highs. It would have made a lot of sense.

That said, I understand why they wouldn't be interested. There's a lot of nostalgia for me when it comes to Bojangles growing up. I'm not going to sit here and tell you it's the best food in the world. I mean, I love their chicken biscuit, they've got some good sweet tea, and I like their seasoned fries, but I'm not eating at Bojangles very often, either. To me, the biggest challenge they've always faced, and the one that I think was proving to be a bit more insurmountable than they initially thought, was taking it beyond the Southeast. This is a Southeastern concept, really. To be able to move across the country is not always so easy. With Bojangles, it had always had that Southeastern identity. I think it's proven more difficult, especially when you have such big concepts out there, successful concepts like Popeye's and KFC and Chick-Fil-A. And Popeye's particularly, because they're focused on that spicy chicken, which is something Bojangles is known for, as well. 

So, not surprising to see it. Probably a good thing, ultimately, for shareholders. There's a reason why I never bought the stock. There's a reason why I never recommend the stock. Restaurants are notoriously difficult, and Bojangles was certainly facing a lot of challenges. We've seen a lot of restaurants get taken out. This is just another one, it looks like. 

Hill: It has been a rough year for publicly traded restaurants. On the flip side, it has been a good year, I would argue, for branding. That leads us to our final email, which is from Eric Smith in Indiana, who simply writes, "Oath is dead, along with Tronc. Long live Verizon Media Group." Earlier this year, we took a victory lap -- rightfully so, in my opinion -- on Tribune Media. After two years of inflicting the name Tronc on the world, they finally had the good sense to backtrack and go to their roots with Tribune. Verizon, last year, as some may recall, merged its AOL and Yahoo divisions into a new group that they called Oath. Let that sink in, for those who may have missed that. Oath. This week, they came out and said that they are rebranding it as Verizon Media Group. 

Moser: I'm blaming the start-up culture for this. Let's face it, we're living in an age where there are a lot of stupid company names, plays on words. You try to come up with something clever, but really, at the end of the day, you have to ask yourself, is this communicating what we want it to communicate? For me, when I look at Oath versus what it's now called -- Verizon Media Group -- it seems so blatantly obvious that Verizon Media Group is the better name. How Oath ever happened ... they're trying to be clever, right? I think Tronc was the same thing. We're living in this day and age where you have a lot of funny company names. Some are sticking, most of them are dumb. I think Oath and Tronc are going to go down in history as dismal failures, and good examples of overthinking something a little bit too much, what the result can be. 

Hill: As we were talking about before we started taping, obviously stupid. When Tronc got announced, and when Oath got announced, the verdict was swift and unyielding. It was like, "This is an obviously stupid name." And, by the way, when we talk about the way Amazon has built their business, and Jeff Bezos, particularly in the earlier days of amazon.com, being hyper-focused on what he referred to as "points of friction" on the website, and saying, "We want to get people as close to the purchase point as possible. Anything that's a point of friction is going to reduce sales." Oath and Tronc, in their own ways, were points of friction. If you get an email, "Hi, I'm So-and-So from Oath," you're going to spend the next 90 seconds or so just being like, "What is this? Oh, it's the media buying group within Verizon. Okay. I'm sorry, what did you want to talk about?"

Moser: Precisely. I feel like the connection that you draw to me with Bojangles on this show, that's your Tronc. Tronc is to you what Bojangles is to me. I feel like we'll look back on this years from now, and we'll still be talking about it. You never let up on it, man. And you like to give people the benefit of the doubt, you're a nice guy. You didn't have any let-up here. You were dead right on, and Oath was very much the same way. There are a lot of frictional costs, as you noted. When you have to reidentify, that's a big problem. If you spend a lot of time educating someone as to what the brand really is in the first place, and then you have to ditch it and start reeducating people as to what it is now -- at least reeducating to Verizon Media Group is going to be a pretty easy leap. "Oh, I get it, you're the media group for Verizon. Why didn't you just say that in the first place?" That's what they should have done!

Hill: I don't think we're ever going to find out what the number is that Verizon spent. And Verizon is a huge company, they make all kinds of money, I get it. But if I were running Verizon, just for my own edification, I would want to know two things. One: as close to the final dollar amount as we can get, what's the cost? Two: whose baby was this? Whoever that is, I'm not saying they get fired, I'm not saying they get demoted, I'm just saying, the next time we're in a meeting and they stand up and say, "I have an idea!" It's like, "No, no. You forfeited your chance to put forth ideas for at least six months. You're in the penalty box."

Moser: It smells like a Gob Bluth doing, from Arrested Development. I can just see this as an Arrested Development episode, where they're coming up with this utter non-sequitur brand identification, and somehow justifying it, and everybody on the outside looking in knows they're getting ready to light a bunch of money on fire. 

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Ann Henry. I'm Chris Hill. Thanks for listening! We'll see you on Monday.