Tag Archives: united-kingdom

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.

QGBR Is An Interesting ETF For Foreign Exposure

Summary I’m taking a look at QGBR as a candidate for inclusion in my ETF portfolio. The expense ratio relative to the diversification within the ETF is not very good. The extremely low correlation with other major funds (like SPY) is great, but is probably just the result of poor liquidity distorting trading data. Low volume makes commission free trading on the ETF a requirement to even consider it. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the SPDR® MSCI United Kingdom Quality Mix ETF (NYSEARCA: QGBR ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does QGBR do? QGBR attempts to track the total return of the MSCI UK Quality Mix Index. Normally at least 80% of the assets are invested in funds included in this index, but there appears to be some leeway under unusual market conditions. QGBR falls under the category of “Miscellaneous Region”. Does QGBR provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is only 32%, which is incredible for modern portfolio theory. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. However, this may reflect the poor liquidity distorting the reported closing price. Standard deviation of daily returns (dividend adjusted, measured since June 2014) The standard deviation is fairly acceptable. For QGBR it is .8570%. For SPY, it is 0.7232% for the same period. SPY usually beats other ETFs in this regard, so that is not a major concern. Major risks The ETF suffers from absurdly low volume. The average volume at times is less than 500 shares per day, which is a major liquidity risk. Investors needing liquidity should avoid this risk. Going through the closing values on a day by day basis shows the problem is even worse. It was very common for the closing value to be identical for several days at a time. While it is possible that shares were traded at that price, it is also possible that this represents a day in which no shares traded hands. The resulting value for the daily return, 0.00%, could cause the standard deviation and correlation that are calculated to be substantially less than the real values. Investors need to be aware of this risk when considering the security. I plan to rebalance my ETF portfolio frequently, but the funds will be in a retirement portfolio that I will not have access to for a long time. Investors that need more liquid securities should avoid this market. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and QGBR, the standard deviation of daily returns across the entire portfolio is 0.6429%. With 80% in SPY and 20% in QGBR, the standard deviation of the portfolio would have been .6538%. If an investor wanted to use QGBR as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in QGBR would have been .7019%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The SEC yield is 3.21%. That appears to be a very favorable yield. For retiring investors the yield may be tempting, but remember that this is not a very liquid security. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .30% for an expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is a tiny bit higher than I want to pay for equity securities, but not high enough to make me eliminate it from consideration. Market to NAV The ETF is at a .91% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. I would only consider using this ETF with limit orders and no commissions on trading. Largest Holdings The diversification within the ETF is pretty bad. There were 7 companies that were each more than 3% of the total holdings. Diversification costs money. I want the expense ratio to be covering the costs of acquiring a more diverse set of securities. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade QGBR with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. I’m interested in QGBR because of the very low correlation, but I’ll need more data before I feel comfortable coming to a conclusion. My general premise at this point is that the stock is so absurdly illiquid that the statistics are substantially misleading it. I think investors should be very wary of buying into any assets with such a painfully low level of liquidity. Before investing, I would probably record the bid-ask spreads at several times throughout the day on several days and compare those values to the NAV at the end of the day. I might consider a small position in the ETF, but even with no liquidity needs I would want to make sure I didn’t get taken for a ride on the entry price. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.