Three Different Types of Currency Hedged ETFs - ETF News And Commentary
22 Fevereiro 2013 - 8:31AM
Zacks
It is true that international investments are generally
characterized with cross border diversification in a portfolio and
substantial capital appreciation potential. However, they also
incur significant risk premium especially
when compared to domestic investments in the form of geo-political
risk, interest rate risk, inflation risk and exchange rate
(currency) risk.
We often hear about the theoretical cushion that currency hedged
ETFs can provide to the investors seeking international exposure.
As the age old saying goes ‘all that glitters are not
gold’. Despite substantially eliminating the currency risk
factor from an investment with international exposure, these
currency hedged ETFs possess a very serious drawback — lack of
popularity among investors.
While this might not seem much initially, lack of popularity can
lead to lower liquidity in the form of lower volumes. This further
increases the already high bid-ask spread for the ETFs and
ultimately increase total costs of investments in them thereby
substantially limiting the profit potential from these investments
(see Currency Hedged ETFs: Top International Picks?). These
currency hedged ETFs utilize currency derivatives to maintain the
hedge while at the same time holding positions in the underlying
equity basket.
Apart from these currency hedged ETFs, investors can also look
into the following three options to gain a currency risk hedged
international equity exposure. However, the underlying problem of
lack of adequate liquidity and popularity remains the same here as
well.
BLDRS Emerging Markets 50 ADR ETF
(ADRE), BLDRS
Asia 50 ADR ETF (ADRA)
and the RevenueShares ADR ETF
(RTR) are three ETFs
which track the performance of American Depository receipts issued
by international companies. American Depository receipts (ADRs) are
a source of raising U.S Dollar denominated equity capital by
companies located outside the U.S.
This makes ADRs publicly tradable instruments in the major U.S
stock exchanges and since these ADRs are U.S. Dollar denominated,
it completely rules out the possibility of any currency risk
whatsoever (read Time to Consider Pure Growth and Value ETFs?).
Of course, the crux of the international exposure for these
instruments lies in the business fundamentals of an underlying
company and the economic fundamentals of its country of origin.
Unfortunately this is the only icing on the cake as far as
international exposure for these instruments is concerned since
capital market diversification is very low (read Q4 ETF Asset
Report: Broad Market ETFs Reign).
ADRE, ADRA and RTR have strong R-Squared values of 80%, 62.48%
and 79% respectively against the S&P 500 indicating little
international diversification benefit. This is not entirely
surprising as these instruments are themselves functions of the
American stock exchanges. ADRE tracks the Bank of New York Mellon
Emerging Markets 50 Index which tracks the performance of ADRs of
50 companies from a variety of emerging markets.
ADRA tracks the Bank of New York Mellon Asia 50 Index. The index
measures the performance of ADRs of 50 companies from Asia. While
the indexes of ADRE and ADRA are market capitalization weighted,
RTR tracks the index which concentrates more on the top line
revenues. It tracks the RevenueShares ADR Index which weighs the
component companies in terms of revenues.
ADRE and ADRA both charge investors an expense ratio of 30 basis
points. However, ADRE seems to be leading in terms of total assets
and average daily volume. ADRE has an asset base of $325.52 million
with an average daily volume of almost 43,000 shares. However, ADRA
has a net asset base of only $29.70 million while trading almost
3,000 shares daily (read The Best Investing Style ETF This
Fiscal?).
On the other hand RTR seems to be a bit pricey at 49 basis
points. At the same time it has not been able to capture much of
investor attention as it has been able to amass an asset base of
just $26.91 million with an average daily volume of around 5,000
shares.
ADRE and ADRA have returned 8.32% and 19.82% respectively for
the one year period ended 31st December 2012.
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BLDRS ASIA 50 (ADRA): ETF Research Reports
BLDRS-EMER MKTS (ADRE): ETF Research Reports
REVENU-ADR FUND (RTR): ETF Research Reports
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