The popular single-stock ETF category is about to embark on a global twist, according to a recent filing with the Securities and Exchange Commission.
Precidian Investments is in the final regulatory approval stages for 18 single-stock ETFs that will offer access to non-U.S. companies listed on foreign stock exchanges.
Unlike the single-stock ETFs that have attracted about $13 billion over the past two years by offering leveraged and inverse exposure to individual companies, the Precidian ETFs will not be levered in any way. They will use currency swaps to hedge out currency risk that impact performance when investing in foreign companies even through American Depository Receipts.
“This is plugging a huge gap in the market,” said Stuart Thomas, founding principal at Precidian Investments in Newtown, Pa.
Currently, U.S. investors buying stock in companies like Anheuser-Busch InBev in Belgium or Toyota Motor Corp. in Japan have a choice of ADRs or foreign ordinary shares, both of which introduce currency risk that is often ignored or overlooked, Thomas said.
He cited Toyota as an example of the potential currency impact.
“Over the last decade, local shares of Toyota outperformed the ADRs by about 4.5% a year as the yen got clobbered against the strength of the U.S. dollar,” Thomas said.
Precidian, which has until now specialized in intellectual property and licensing, is new to the ETF space, but Thomas sees an opportunity across the investing landscape.
“It’s an educational process, because most investors, including some professionals, think by buying these ADRs on U.S. exchanges they don’t have currency exposure,” Thomas said.
Interest in Leveraged, Inverse Strategies Grows
Aniket Ullal, vice president of data analytics at CFRA and a member of the etf.com advisory board, said single-stock ETFs have been riding a wave of interest in leveraged and inverse strategies.
However, he isn’t convinced a currency hedging feature will gain the same kind of appeal among investors.
“Currency hedging is less important now than it was a year or two ago when we saw significant differentials,” he said. “It’s an interesting category, but it feels like this would have been good to have a year ago.”
Nate Geraci, president of The ETF Store in Overland Park, Kans., said the popularity of single-stock ETFs is such that “issuers are incentivized to try their hand here.”
“It makes sense that they would look globally for stocks that might capture the imagination of investors,” he added. “From an ETF issuer’s perspective, launching these products is essentially like buying lottery tickets.”
Meanwhile, Paul Schatz, president of Heritage Capital in Woodbridge, Conn., sees single-stock ETFs as noisy distractions for less-serious investors.
“Single-stock ETFs are the next in a long line of ways to turn investing into gambling,” he said. “While I think they are here to stay and will continue to grow, buyers should always beware and have an exit plan, which most don’t.”
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