Thursday, August 17, 2006

Currency Hedging with American Depository Receipts (ADRs)

For those of you who have already read my May, 2006 posting about Investing in ADR (American Depository Receipt) Stocks, you may have been able to make impressive investment returns, for two reasons. If you watched both the currency-rates and the stock prices during this time and jumped in when the stock market had a mini correction that bottomed out early-mid June:
  • the stock markets, both here and abroad, performed rather well since that bottom;
  • the United States Dollar (USD) tanked against the British Pound (GBP) and other currencies worldwide during that same period.
The overall stock market move is a bit irrelevant to the ADR thing, but the second ROI reason is all about currency fluctuations and how they affect your ADR share-price returns.

A couple of London Stock Exchange stocks that have ADRs here in the USA that I regularly follow are Barclays PLC and HSBC Bank (which I used as an example in the 5/13/06 article). Let's say you timed things very well and got into each at roughly their bottom in mid-June, and examine what your returns would be and why:
  • Barclays (ADR ticker: BCS) - on the London Exchange, it was trading at 586 Pence at its low, and closed today at 653.5 Pence. Return on the London market: 11.52% . . . Impressive, but, the BCS ADR during the same time hit a $43.23 bottom, and a $49.64 close today, or a whopping 14.83% return, which is quite nice, especially considering we are talking about large blue-chip type banks that roll off a healthy 3-4% dividend! Your ADR returned an extra 3.3% on your investment during the same period! The difference in returns reflects the tanking USD during this period.
  • HSBC (ADR ticker: HBC) - on the London Exchange, it was trading at 913 Pence at its low, and closed today at 951.5 Pence. Return on the London market: 4.22% ... and, the HSBC ADR during the same time hit a $84.34 bottom, and a $90.35 close today, or a 7.126% return, which is darn solid too for such a short timeframe. Your ADR returned an extra 2.9% on your investment during the same period! That extra return reflects the substantial drop in the purchasing power of the USD during this period.
Now, you may be asking why both stocks did not return the same 3.3% "extra" due to currency swings: simple, one stock hit its low on a different (later) date than the other, and the currency exchange rates had already changed some.

So, keeping these examples in mind, there can be opportunity to hedge against the falling dollar by purchasing American Depository Receipts (ADR) stocks. This is not as direct as simply playing the currency market on a ForEx trading platform or such, but it is probably less likely to cause you to lose all your money doing risky currency-swing trades. Do some research, and consider the options that are available. There are ADRs for UK stocks as well as German, Japanese, Israeli, and many other firms.

Keep in mind, as I pointed out in my prior article, you can play this swing both directions. If the US Dollar strengthens greatly while you hold an ADR, you can just as quickly see the multiplier working against you. If you want more information, read that first posting of mine. If you still need more, let me know and I will try to dive deeping into investing in foreign stocks in this manner, especially in order to hedge against any devaluation in the US currency.

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