Blog

Currency-Hedged BRIC ETFs?

June 27, 2012
Share:

The BRIC currencies have taken it on the chin in the past year, and ETF investors need to have the tools to manage that risk.

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 (NYSEArca: DBEM) -- 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.

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 (NYSEArca: BKF), the Guggenheim BRIC ETF (NYSEArca: EEB) and the SPDR S&P BRIC 40 ETF (NYSEArca: BIK).

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.

 

ETF.COM CHANNELS

Trying to figure out alternatives ETFs? Use our alternatives ETFs channel, library and ETF screener!

Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!

ETF DAILY DATA

'SPY' raked in more than $5 billion in assets Wednesday, Aug. 26, with 'DIA' and small cap 'IWM' not far behind, as investors returned to U.S. equities after a four-day market correction.

'SPY' paced State Street's issuer-leading inflows Wednesday, Aug. 26, as total U.S.-listed ETF assets settled at $1.975 trillion.

ETF.COM ANALYST BLOGS

By Dave Nadig

With many ETFs currently trading well off fair value, what’s an ETF investor to do? Don’t panic.

By Matt Hougan

Out-of-favor funds can bring attractive returns.

By Matt Hougan

New data from Charles Schwab show that the death of mutual funds is happening faster than we thought.

By Dave Nadig

Grab the popcorn. Precidian just doubled-down on its nontransparent active ETF proposal with the SEC this morning.

ETF INDUSTRY PERSPECTIVE

By John Del Vecchio

An index that goes long financially sound companies and shorts the ones with problematic balance sheets.

By Dan Draper

The nature of retirement is changing. How can investors adapt?

By Invesco PowerShares

A more in-depth look at the smart-beta survey's results.