The following question is from AJ:
I am wondering about an online article titled ETF Sector: Slop du jour published in the summer 2007 issue of Canadian Business magazine. The relevant section says: ‘The other building block advisers typically recommend is an emerging markets ETF. John De Goey, a senior adviser at Toronto-based Burgeonvest Securities, cautions against the most popular of these, the iShares MSCI Emerging Markets Index Fund (NYSE: EEM). Even though it has a 20% return over the past year and is well diversified, Canadians will expose themselves to currency risk since it trades in U.S. dollars. “You would have made money, but a good chunk of it would have been lost in the currency conversion,” De Goey says. Instead, he likes the Claymore BRIC (TSX: CBQ), which trades in Canadian dollars and boasted a 28% return in 2006. The drawback: it’s less diversified, offering securities from Brazil, Russia, India and China. Yet for De Goey, the currency risk of EEM is still greater than having less diversified holdings in a BRIC fund’.
Why would trading the same stocks in U.S. vs. Canadian dollars expose you to currency risk if the companies assets are all overseas? Even if the U.S. dollars falls you should be protected if the foreign currency moves upward with the Canadian dollar as you mention in this post: “You can essentially ignore the CAD-USD fluctuation for broad international ETFs like Vanguard Europe Pacific ETF (VEA), iShares MSCI EAFE ETF (EFA), Vanguard Emerging Markets ETF (VWO), iShares MSCI Emerging Markets ETF (EEM) etc., country-specific ETFs like iShares MSCI Japan ETF (EWJ), iShares MSCI Australia ETF (EWA) etc. and even ADRs that trade in US exchanges but are denominated in local currencies like Nokia (NOK)”.
I don’t understand why Mr. De Goey would come to a different conclusion. Am I missing something?
- The Claymore BRIC ETF (TSX: CBQ) uses ADRs listed in the US exchanges and hedges the CAD-USD fluctuations. So, you can think of CBQ as providing you with a narrow emerging market exposure and currency fluctuations of local currencies with the USD.
- A broad emerging market ETF like Vanguard Emerging Markets ETF (VWO) or iShares MSCI Emerging Markets Index Fund (EEM) will provide you with a broad emerging markets exposure along with currency fluctuations of local currencies with the CAD.
It is not clear to me why currency exposure in (1) is less risky than (2), unless you buy into the notion that the U.S. dollar will depreciate forever against emerging market currencies. Personally, I would pick VWO because of it (a) provides broad exposure to emerging markets and (b) cheaper than CBQ. Do you have any comments on AJ’s question?