Currency-Hedged BRIC ETFs?

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I began thinking along those lines on the train into work this week, when I saw a Bloomberg headline that read:“BRICs Biggest Currency Depreciation Since 1998 Set to Worsen.”

Being the ETF geek that I am, the first thing that came to mind was, “Why isn’t there a currency-hedged BRIC ETF on the market yet?”

The Bloomberg story I’m referring to not only illustrated just how rough it’s been in the past 12 months for the currencies of the four BRIC countries—Brazil, Russia, India and China—it also painted a pretty bleak outlook for them moving forward.

Because Deutsche Bank’s U.S. ETF arm, db-X, has already launched a currency-hedged developing markets portfolio -- the db-X MSCI Emerging Markets Currency-Hedged Equity ETF (DBEM - News) -- it strikes me as odd that a BRIC counterpart doesn’t already exist.

That may change in the coming months, but in the meantime we are left pondering what might have been.

Let’s take a look at the currencies of the four BRIC nations over the past year.

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Currency Returns Past Year

As you can see, only the Chinese renminbi, which has a managed exchange rate, was able to escape the negative effects of a strengthening dollar.

The other three currencies—the Brazilian real, Indian rupee and Russian ruble—have all fallen sharply in the past year, with the real and rupee both down more than 20 percent.

For investors in the three existing BRIC funds, all of which have no currency hedges, that means huge losses.

Those funds are the iShares MSCI BRIC Index Fund (BKF - News), the Guggenheim BRIC ETF (EEB - News) and the SPDR S'P BRIC 40 ETF (BIK - News).

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BKF_EEB_BIK_Return Past Year

What’s interesting about this chart is how big a role currency depreciation has played in setting those returns. Each portfolio’s weightings to Russia, India, Brazil and China is shown below and, by stripping out the currency returns of each, we get two sets of one-year returns:hedged and unhedged.

 


 

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BKF_EEB_BIK_Exposure and Returns

It’s clear that in the past year, investors would have stopped a fair amount of bleeding if they had had currency-hedged exposure to the BRICs, even considering the big weightings to China and the renminbi’s ascent over the past year.

In the case of Guggenheim’s EEB, they might have spared themselves more than half of the losses they sustained by hedging their currency risk.

Of course, it’s worth mentioning that in prior years, when local equity markets were rising and each country’s respective currency was gaining relative to the dollar, investors would have missed out on a major component of returns.

Further, you can debate the merits of investors having the ability to make currency calls. I get that.

After all, it’s hard enough to sift through the preponderance of available information well enough to make the correct allocation decision in the first place, let alone determine how the many moving parts of contrasting monetary and fiscal policies will impact currency crosses.

That’s all fair enough, but giving investors that choice is a hallmark of the ETF industry. So, whether investors even get to make that choice is up to the product management divisions of the issuers.

I feel strongly that arming investors with a product that affords them the ability to make that choice seems like a worthwhile endeavor.

Time will tell if anyone with some skin in the game agrees with me.

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