I passed along reader questions received in an earlier post on Claymore Broad Emerging Markets ETF (CWO) to Som Seif, President of Claymore Investments. Here’s his response:
- Currently, 100% of CWO’s holding is the Vanguard Emerging Markets ETF (VWO). Does CWO plan to hold emerging market stocks directly in the future? If CWO does plan to hold 100% in VWO, is that the reason why the precise benchmark that is tracked is vague in the factsheet?
SS: The benchmark is the MSCI Emerging Markets index. We left [it] open in filing prospectus as we were working to sort out which index we were going to bring. We do plan on holding VWO for now; it’s a good way to execute as the fund is smaller. Over time, we may add individual securities.
- The fact sheet mentions that CWO hedges the currency exposure but it is unclear which currency fluctuation is hedged? Is the hedge on CAD/USD fluctuations or CAD/Emerging market currency fluctuations?
SS: We are hedging the currency currently of the USD/CAD. But this is because the USD hedge is a very strong proxy hedge to the individual currencies of the emerging countries. If you factor in the cost of hedging (spread, interest rates) each of the individual countries, hedging the USD is the best way to proxy hedge. Over time, as the size of assets increase, we may start to hedge some of the individual currencies, but again, USD is likely just as strong (correlation of USD hedged vs. local MSCI Emerging markets index is very high).
- Related to (2), why does the Claymore BRIC ETF (CBQ) hedge the CAD/USD exposure while still is exposed to the USD/Emerging market currency fluctuations? Why does it make sense for Canadian investors to take on USD/Emerging markets currency risk but avoid the CAD/Emerging markets currency risk?
SS: Same as (2). One thing that is REALLY important, I think gets lost by many individual investors (when I read the blogs) is they don’t consider the FX trading costs of buying US traded ETFs. I think it needs to be better understood. Example: A US Vanguard ETF, say 10 bps MER, looks very low cost, but for a Canadian, it is actually quite expensive.
If you buy US ETF, pay 1-1.5% FX exchange rate on trades (i.e. $10,000 CAD buying $8,000 USD, spread of spot FX versus what bank/discount broker charges). If you hold ETF for 2 yrs, and then sell again, with 1-1.5% FX cost.
All in cost = 1% + 0.2% + 1% = 2.2%/2 yrs = 1.1% MER per annum… this is much different than Canadian traded ETFs. And FYI, the shorter the hold, the more expensive this is.
This needs to be understood. People compare buying a Canadian traded ETF vs. buying a US traded ETF directly by their MER differences. But in fact, it’s the smallest difference. Wherever possible, they should always trade CAD traded ETFs before they buy US traded ETFs.
