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
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
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
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
Currency Hedged ETFs: Top International
). 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
BLDRS Emerging Markets 50 ADR ETF (
BLDRS Asia 50 ADR ETF (
RevenueShares ADR ETF (
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
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
ADRE and ADRA have returned 8.32% and 19.82% respectively for
the one year period ended 31
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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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