Tag Archives: government

3 ETFs To Fight Against Global Currency War

The world is heading towards a currency war as a number of countries are choosing loose monetary policies to stimulate the sagging growth and prevent deflationary pressures. This is in stark contrast to the U.S. Fed policy of tightening its stimulus program by wrapping up QE3. The diverging central bank policies have propelled the U.S. dollar to a nine-year high. While a weak currency might provide short-term economic boost to the countries engaging in currency devaluation, this might take a toll on global trade and capital flow in the long term. A Look to International Easing Action Several countries in recent months cut their interest rates or took other actions to boost growth in their economy. The first and foremost country is Japan, which unexpectedly expanded its bond buying plan to 80 trillion yen from 60-70 trillion yen per year and tripled the pace of purchasing stocks and property funds (REITs) in October. Further, the government of Japan recently approved a spending package of 3.5 trillion yen ($29.12 billion) to boost consumer spending and regional economic activity. In November, the People’s Bank of China surprised the global market with a cut in interest rate for the first time in more than two years. The central bank slashed the one-year lending rate by 40 bps to 5.6% and the deposit rate by 25 bps to 2.75%. Further, China’s central bank lowered the reserve requirement ratio by 50 bps to 19.5%, effective February 5. Other nations also followed suit this year. The Reserve Bank of India ( RBI ) cut interest rates by 25 bps to 7.75% first time in almost two years while Swiss Bank scrapped its three-year old currency cap against the euro, which was pegged at 1.20. Meanwhile, the Bank of Canada reduced interest rates by 0.25% to 0.75%, representing the first rate cut since April 2009. The Turkey central bank trimmed one-week repo rate by 50 bps to 7.75% while Peru reduced the benchmark interest rate by 25 bps to 3.25%. Egypt too lowered the deposit rates and lending rates by 50 bps to 8.75% and 9.75%, respectively. The Danish central bank cut its deposit rate thrice in two weeks to a negative 0.35% from a negative 0.20%. The European Central Bank (ECB) launched a bond-buying program, committing to pump €1.14 trillion ($1.16 trillion) into the sagging Euro zone economy over the next one and half years. It plans to buy €60 billion of government bonds, debt securities issued by European institutions and private sector bonds per month through September 2016. Singapore announced a surprise currency policy easing, wherein the Monetary Authority of Singapore reduced the slope of the appreciation of the Singapore dollar against a basket of currencies by a percentage point. The most recent move came from Reserve Bank of Australia, which lowered interest rates by 25 bps to a record low of 2.25%. This is the first rate cut in 18 months. Further, Russia slashed the one-week repo rate to 15% from 17%. With that being said, the U.S. dollar is surging and other currencies are slumping. And investors need to be cautious when looking to invest outside the U.S. This is because a strong dollar could wipe out the gains when repatriated in U.S. dollar terms, pushing the international investment into red even if the stocks perform well in the rising-dollar scenario. How to Play? With the advent of the currency hedged ETFs, it has become easy for investors to cope with this situation. This is especially true as these funds look to strip out currency exposure to a foreign economy via the use of currency forwards or other instruments that bet against the non-dollar currency while at the same time offers exposure to the stocks of the specified nation. While there are a number of ETFs targeting specific nations, we have highlighted three ETFs that provide broad international play or exposure to more than one country. Deutsche X-trackers MSCI All World ex U.S. Hedged Equity ETF (NYSEARCA: DBAW ) This fund offers exposure to the stocks in developed and emerging markets (excluding the U.S.) by tracking the MSCI ACWI ex USA U.S. Dollar Hedged Index while at the same time provides hedge against any fall in the currencies of the specified nation. In total, the fund holds a broad basket of more than 1,300 securities with none holding more than 1.46% share. However, it is skewed towards the financial sector with 26.9%, followed by consumer staples (13.2%) and consumer discretionary (11.3%) Among countries, Japan and United Kingdom take the top two spots with at least 14 share each while Switzerland, Germany and France round off the top five with single-digit exposure. The ETF has amassed $16.3 million in its asset base while trades in a light volume of 12,000 shares per day on average. Expense ratio came in at 0.40%. The fund is up 12.2% in the trailing one-year period. iShares Currency Hedged MSCI EAFE ETF (NYSEARCA: HEFA ) For a broad foreign market play without currency risks, investors could also consider HEFA which focuses on the EAFE region – Europe, Australasia, Far East – for exposure. This product follows the MSCI EAFE 100% Hedged to USD index and is basically a holding of the iShares MSCI EAFE ETF (NYSEARCA: EFA ) with currency hedged tacked on. Financials dominates the fund’s return with one-fourth share while consumer discretionary, industrials, consumer staples, and health care also get double-digit allocation. Top nations include Japan, United Kingdom and Switzerland, while France and Germany round out the top five for this well-diversified fund. The fund has AUM of $391.2 million and average daily volume of roughly 162,000 shares. It charges 39 bps in annual fees and expenses and has added 11.6% since its debut almost a year ago. Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF (NYSEARCA: DBEM ) This product tracks the MSCI EM U.S. Dollar Hedged Index, which provides exposure to the emerging equity market and hedges their currencies to the U.S. dollar. The fund holds 460 securities in its basket, which is widely spread out across each component with none holding more than 3.86% of assets. Chinese firms takes the top spot at 22.5% while South Korea, Taiwan and Brazil round off the next three spots. From a sector look, financials accounts for the largest share at 28.6% closely followed by information technology (13.8%), telecom services (11.1%) and consumer staples (10.6%). The fund has managed $103.2 million in its asset base while trades in good average daily volume of around 162,000 shares. It charges 65 bps in fees per year and has returned 10.4% over the past one year. Bottom Line The popularity for currency hedging strategies has been on the rise on a strengthening U.S. dollar and the prospect of higher interest rates in the U.S. against lower interest rates in other countries. These products are expected to perform better than the traditional funds in the coming months thanks to the global currency war.

Investing In The Russian Market: Oil ETFs Are Better Than Russia-Focused ETFs

The Russian Central Bank surprisingly cuts the key rate to 15%. The implementation of the anti-crisis plan meets first obstacles. ETFs that focus on Russia are unlikely to rise at the same pace as oil ETFs in case of an oil price upside. Russian market has recently been under serious pressure due to sanctions, falling oil prices, devaluation of the ruble and weakening economy. A number of investors believe that the Russian market is cheap right now and await an oil price upside, hoping that it will provide significant upside to ETFs that focus on Russia, like the Market Vectors Russia ETF (NYSEARCA: RSX ), iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) and SPDR S&P Russia ETF (NYSEARCA: RBL ). However, I would like to argue that investors will be better off investing in oil ETFs, like The United States Oil ETF (NYSEARCA: USO ) or The United States Brent Oil ETF (NYSEARCA: BNO ), if they believe in a bright future for oil prices. Currently, energy accounts for 43.04% of RSX holdings , 49.63% of RBL holdings and 51.97% of ERUS holdings . This means that approximately one half of holdings of these ETFs is not directly related to oil prices. One could argue that oil prices are the single-most important factor for the Russian economy. When oil prices rise, the economy and all its sectors feel better. While this is partly true, I think that there are negative factors that will pressure RSX, ERUS and RBL. The first factor is the continuing devaluation of the ruble. In my view, rising oil prices will not provide a corresponding upside for the currency. This point was recently highlighted by the surprise cut of the key interest rate by the Russian Central Bank on January 30. While Brent oil prices have enjoyed a significant upside since then, the ruble remained roughly unchanged. When the Central Bank was raising its key rate to 17% in December, it stated that these measures were necessary because of ruble depreciation risks and inflation risks. While commenting on the reduction of the key rate from 17% to 15%, the Central Bank stated that it saw a stabilization of inflation and depreciation expectations. In my view, this is a rather strange conclusion. The Central Bank stated that annual consumer price growth rate was 13.1% as of January 26. In comparison, 2014 inflation totaled 11.4%. These numbers show that inflation is increasing rather than stabilizing. The Russian ruble started this year at 59.18 to the dollar. It is trading at 68.92 to the dollar as I’m writing this article. In my view, a 16% devaluation of the ruble cannot be called a “stabilization of depreciation expectations”. Meanwhile, a 15% key rate is still prohibitive for most businesses, and the recent interest rate cut might signal a shift in the Central Bank’s policy. Further rate cuts will lead to more downside for the ruble, pushing RSX, ERUS and RBL lower. The second thing that I’d like to mention is the government’s anti-crisis plan . While the government is sure that it has enough reserves to ensure the implementation of this plan, the process is not going smoothly. The Russian Ministry of Finance stated (please note that the link is in Russian) ( Google translate link ) that it would not be able to allocate enough funds for several anti-crisis measures. While the Ministry of Economic Development proposed to spend 40 billion rubles ($580 million) on credits for Russian regions in the first quarter of 2015, the Ministry of Economic Development is ready to allocate just 10 billion rubles ($145 million) for these measures. In my view, it will take time before the Russian government is able to develop a unified position on the implementation of the anti-crisis plan. Meanwhile, the economy is suffering, and Morgan Stanley is predicting that Russia’s GDP will drop by 5.6% in 2015. In my view, the lack of coordination within the government supports my previous thesis that the situation in the Russian economy will get worse before it gets better. I believe that the fate of the Russian economy remains in the hands of oil prices. I remain skeptical on the current anti-crisis measures. What’s more, I think that ETFs that focus on Russia won’t be able to outperform oil ETFs in the near term. I think that further depreciation of the ruble and problems with the implementation of the anti-crisis plan will hit the non-energy part of RSX, ERUS and RBL portfolios. In my opinion, if an investor is bullish on oil, they should buy oil ETFs rather than ETFs that focus on Russia. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.