The Impact of the Dollars’ Fall on Portfolios

A few years’ back the dollar fell significantly against other currencies around the world.  US citizens who don’t travel overseas may not have seen the impact, but the impact was real in terms of investors in that anyone holding overseas assets (Europe, Canada, Australia) saw a “double return” in that the investments themselves rose and the return after the currency surge was an even bigger boost.

Then the dollar rose against most other currencies, and there were discussions that the Dollar / Euro ratio would move towards 1/1.  In general, if anyone has a prediction about FX, treat it with more than a grain of salt, because the consensus is often very wrong.

ETF’s took notice of investors wanting to get the underlying return of foreign stocks without the impact of the US dollar vs their currency, and ETF’s like HEFA were created.  HEFA takes a non-US portfolio of large capitalization stocks from major markets around the world and hedges them against fluctuations in the US dollar.  While it isn’t a perfect mix (because the underlying weighting of stocks comprising each index are different), HEFA under-performed the Vanguard non-US stock  ETF VEU by a bit less than 10%.  This is what you’d expect because the dollar fell by about 10% when compared to a basket of major market currencies during the last 12 months.

In this case, buying HEFA hurt returns because the dollar fell against foreign currencies.  When the dollar falls, you are better off in foreign assets.  On the other hand, HEFA would have been a superior investment to VEU during all the times when the US dollar was strengthening.

Portfolio Two Updated March 2016 – Tax Time

Portfolio Two is our second longest lived portfolio, at 11 1/2 years old.  The beneficiary contributed $6500 and the trustee $13,000 for a total of $19,500.  The current value is $27,814 for a gain of $8,314 or 43%, for a rate of return of 5.2% adjusted for the timing of cash flows.  You can see the detail here or on the link on the right side of the page.

Portfolio Two is now unlike all the other portfolios.  Our goal is to have about 1/3 of the value in interest rate products (CD’s), about 1/3 in US stocks (VTI) and 1/3 in international stocks (VEU and HEFA).  This portfolio will invest only in CD’s and ETF’s going forward.  This is similar to the “basic investing plan” listed on the site header.

In 2015 we sold all the individual stocks in the portfolio, for a net long term gain of approximately $7300.  In the past, figuring out the cost basis for your stocks was difficult but today the brokerage firm put the cost basis on each of the sales along with the trade date (to determine whether it is a short or long term trade) which makes it easy to calculate (if a little bit tedious, unless you can download your brokerage account directly to your tax software).  It depends on how it comes out but we are hoping that this goes under the tax rate at 15% or about $1100 but it will depend on the net calculation and other earnings of the beneficiary and the parent.

Hedging the US Dollar in the “Basic Plan”

Recently the US dollar has strengthened against most foreign currencies.  This means that you could buy foreign stocks and they could do well in their local markets (for example, the Japanese stocks were generally up for a time) and yet you would have losses when your ADR or ETF was valued in US dollar terms.

While you cannot generally hedge the currency risk in a single stock ADR (for example, Toyota), they now offer ETF’s that give exposure to foreign markets but also hedge those currencies against the US dollar, so you receive their “actual” return (good or bad) rather than their actual return PLUS the impact of the rising or falling US dollar.

For instance, let’s look at the VEU Vanguard ETF (one of my favorites, the Red line below) against a new ETF I started looking at, HEFA (the Blue line), over the last two years.  You can see that the total return was 1.1% positive in HEFA and 14.2% negative for VEU over that time span.  This difference is due almost totally to the rise in the US dollar against foreign currencies that make up the bulk of those stock indexes (the Euro, the Japanese Yen, the Australian Dollar, and the Canadian Dollar).  You can see that the peaks and valleys of the blue and red lines track together (they move in the same direction) but the red line sinks as the US dollar rises over the last two years.


VEU vs HEFA Last 2 years
VEU vs HEFA Last 2 years

One negative impact of this, all else being equal, is that hedging costs money and this should be expected to drive up fees on your ETF.  The ETF for Vanguard (VEU) is 0.14%, which should be considered somewhere near rock bottom.  The HEFA ETF expense ratio is 0.35%, which is also very low, but higher than the Vanguard product.  This isn’t a perfect comparison because generally the Vanguard ETF’s have the lowest expense ratios due to their member-owned structure.  HEFA is part of iShares which is now owned by Blackrock, a major competitor of Vanguard.

It should be noted that the VEU and HEFA indexes aren’t exactly the same in terms of countries that they cover and weighting of markets but as you can see above they generally move closely in tandem and the majority of the difference is due to the impact of the US dollar against foreign currencies.

This is of interest because the US Federal Reserve is considering raising interest rates soon, which theoretically would cause the dollar to rise which would make holding shares in other currencies less profitable.  Of course this is already priced into the dollars’ current level, which could mean in practice that if the Fed doesn’t move fast enough or make enough moves, the dollar would fall.  If anyone ever tells you that they can predict interest rates or currency moves you should not believe them; there is no reliable way to predict either one although there are mass industries of pundits attempting to do so.

Thus for my “basic plan“, the question is, should you also consider adding currency-hedged ETF’s and not just the two basic ETF’s (VEU and VTI).  The question is whether to replace part of your VEU allocation (how much you buy) with something like HEFA (there are other ETF’s, but this seems to be a pretty good one, with a large base of investors and from a company like Blackrock which isn’t going away any time soon).  Here’s what would happen – if the US dollar falls against major foreign currencies, you are going to make less money than you would otherwise if you hedge it.  If the US dollar rises, you will make more money than you would otherwise with the hedged product.  Also note that the hedging may not be perfect, but would likely shield you from the vast majority of the impact, especially on major currencies like the Euro.

I think that this is getting a lot of play in the financial press right now and I predict that at some point these products will be mainstream.   It took a long time to move from “active” to “passive” investing and it has taken many more years for ETF’s to begin to take a large share of new investments away from mutual funds.  This is another long term trend that started on the margin (there were very few currency hedged funds a couple years ago when I looked, and they were expensive) but is now going mainstream, and the additional expenses for hedging seem quite modest (0.14% vs. 0.35%).

Trends in Stocks

Investing in stocks is always hard.  You are looking at data about the past but you are betting on an individual stock in the future.  In addition, there has been huge correlation among stocks and markets and the impact of currencies and central bankers (often inter-twined) has given various world markets boom and bust qualities.

In the US, there are two markets, the NASDAQ and NYSE.  NASDAQ has traditionally been more technology focused, meaning that when these stocks go up, the NASDAQ soars.   Here is a quote on “the only six stocks that matter” about the NASDAQ from the Wall Street Journal:

Six firms— Inc.,Google Inc.,Apple Inc.,FacebookInc.,Netflix Inc. and Gilead Sciences Inc.—now account for more than half of the $664 billion in value added this year to the NasdaqComposite Index, according to data compiled by brokerage firm JonesTrading.

Thus the bottom line is that if you don’t have these stocks in your portfolio, the overall index may be rising (and our benchmark for performance), but your own returns will be worse.  We do have some of Amazon and Facebook in portfolio 2, but not much of it overall.

Outside the USA, foreign markets have been hurt by the rising US dollar, which makes their market values lower for us here in the USA (where the dollar is our currency).  This hurts stock investments in Europe (the Euro), Canada (the Loonie), and Australia (the Australian dollar) if you are denominated in US dollars (which we are).   The dollar is up significantly vs. almost every other currency in the world with the exception of the Chinese Yuan.

The Chinese market went crazy this year, in what appears to be a major bubble, that recently started crashing and was accompanied by strong intervention from the central authorities, who went after short sellers and even stopped stocks from trading for various reasons.   At one point almost the entire Chinese stock market by valuation (over 80%) was not trading.  The rationale is that if stocks are heading down, and you can stop trading, then this gives the market participants time to stop panicking.  This type of intervention stops the market from functioning efficiently, however, and will have many other unforeseen impacts down the road.

Mergers and acquisitions (M&A) activity also soared in 2015, which is a sign of bullishness and also likely a sign of a market peak.  A Wall Street Journal article recently summed it up:

Companies are merging at a pace unseen in nearly a decade. Halfway through the year, about $2.15 trillion in M&A deals or offers have been announced globally, according to Dealogic. That puts 2015 on pace to challenge the biggest year on record, 2007, when companies inked deals worth $4.3 trillion… In industries ranging from health care to technology to media, chief executives are rushing to make acquisitions, often either in anticipation of takeover moves by rivals or in response to them.

When acquisitions occur, you as a stock market investor typically want to be the “acquired” company, not the “acquirer”.  The “acquired” company receives a premium price to their current market value but the burden of “earning” that higher price falls on to the acquired company, and typically M&A does not pay off long term for most companies (as opposed to internal or “organic” growth).  While there have been many acquisitions, most notably in the health care / insurance / pharma industry which is consolidating under Obamacare, our portfolios had few of these acquired companies in the mix.

Finally, you had a decimation of the commodity indexes.  Commodities such as oil, some foodstuffs, natural gas, iron ore, copper, gold, etc… have seen their prices collapse, which in turn damages the stocks of mining companies, oil companies, and many other participants in the commodity value chain.  Per Bloomberg:

Almost all commodity markets have taken a severe beating lately. The aggregate Bloomberg Commodities Index is down 61 percent from its 2008 peak and 46 percent from the 2011 post-crisis high

These are severe reductions.  They impact entire economies particularly the Arab countries (which make all their export income in oil), Russia (many commodities), Australia and Canada.  There are large “secondary” impacts as well – reduced commodity prices hurt service demand in Canada and Australia and put their housing boom at risk.

So what does this mean for us and our portfolios?  We’ve been hurt by the commodity bust, the rise of the US dollar (on our foreign stocks), and we’ve missed some of the booming stocks because they were narrowly concentrated in a few names and some of the largest M&A was in sectors where we had few investments.

We are now going to look at some of the stocks and cull some prior to our next round of purchases which will occur in August – September as the beneficiaries of the various portfolios head off to school for the year, and will tie new purchases (of the cash) with additional investments that will be made soon.

Portfolio Four Updated March 2015 – And It’s Tax Time

Portfolios four and five are both five and a half years old. The beneficiary has invested $3000, the trustee $600, for a total of $9000. The fund value is $11,051 for a gain of $2051 or 22%, which works out to about 5.9% / year across the life of the portfolio. You can see the details here or go to the links on the right side of the page.

The portfolio has many dividend stocks and in 2014 earned $341, or a yield of about 3.2% / year. That is a great yield and helps performance over the long term. There were no stock sales in 2014.

Currently we have a few stocks on watch:

– Nucor (NUE) – the US steel maker downgraded its profit targets since the US is being “flooded” with foreign steel from loss making state owned companies (primarily in China). It is surprising that the stock didn’t fall further with this decline in earnings guidance
– Devon (DVN), Royal Dutch Shell (RDS.B) and Statoil (STO) have all been hit by the crashing price of oil. Also Shell and Statoil are in UK Pounds and Norwegian Kroner and both of these currencies have declined vs. the US dollar, which adds to the difficulties. For now we are holding on to these although they also are on watch
– Coca Cola Femsa is the latin America (Mexico mainly) distributor of Coke. It has been hit by the declining peso like all foreign investments. We will hold but likely put a collar on this stock in case it falls much further. Would be good to have investments in Mexico since it is a rising economy

Portfolio One Updated March, 2015 – and it’s Tax Time

Portfolio One is our longest lived portfolio, at 13 1/2 years. I remember the first day we invested very well – it was right after 9/11/01, and the markets were closed for a few days. The beneficiary’s mother asked me if investing was the right thing to do and I said that we had a long run out in front of us.

Portfolio One has a value of $34,875. The beneficiary contributed $6500 and the trustee contributed $14,500 for a total of $21,000. The gain has been $13,875 or 66% since inception, which works out to approximately 6.9% / year. You can see performance here or use the link on the right sidebar.

It’s tax time. The brokerage sends a nice form. Over the years this has gotten easier as they have the cost basis on the stock for each sale and whether it is a short or a long term gain. Apparently you have to buy the higher level Quicken if you need to do any individual stock sales which probably means that the average American filer doesn’t have much at all in terms of stock gains or losses (in a non-retirement account) and that is sad. Likely in the old days all you had to do was leave your money in a bank account and earn some interest but nowadays I don’t even receive a tax form for interest for these accounts anymore because we literally earn 2 cents / year for the cash on hand in these individual accounts.

We had dividends of $816.17 and long term losses of ($165) and short term losses of ($801). In 2014 we sold Twitter, CNOOC, Urban Outfitters, Yandex, Philip Morris and China Petroleum. Not that we have the benefit of hindsight at the time we make sales like this but of the 6 we sold all but one (Twitter) are below the price right now of where we sold them.

Of the stocks we currently hold, most are pretty far above their cost basis, except for Statoil (the Norwegian oil company) which was hit like all oil companies by the fall in the price of oil and then there was a double whammy because the US dollar appreciated against the Norwegian Kroner which means that the stock price hit is magnified in US terms (it did better on the local exchange if you were a Norwegian holding your investments in Kroner). Our most recent tranche of Exxon is also down but overall that is a good stock to hold for the long term with a nice dividend and a ruthless and focused executive team.

The dividends number is nice. Every year this portfolio earns almost $900 in dividends, on about $34,000 invested in stocks of average, (the cash returns interest, which is zero),for about 2.6% yield. Since cash returns zero as we discussed above this is how you earn any sort of income anymore – you need dividends back from your stock. Qualified dividends receive a lower tax rate – it doesn’t impact the beneficiary as much as it impacts us – but for some reason not all dividends qualified. It turns out that you have to hold the stock for 60 days to receive the tax benefit and often there is a first dividend payment before we hit that date.

I pass on all this information to the beneficiary and now they are adults and they need to do their own taxes. That is a sign of adulthood when you finally realize how much taxes you pay every year to social security, medicare, the Federal government, the State government, etc…

The Rise of the Dollar

When I was growing up as a kid I remember they had TV commercials against Jimmy Carter explaining how the dollar declined vs. other currencies over the decades. In the late 1980’s the Japanese Yen soared in value until their market crashed in 1989. The Euro was originally near parity with the dollar, then fell to 70 cents on the dollar (I happened to be in Europe at the time, it was great), then rose to over $1.30 against the dollar.

In general if you keep your portfolio all in US assets you are essentially “100% long” against the dollar. A few years ago the dollar effectively fell almost 40% vs. many of the worlds’ major currencies – this is the time when the Canadian and Australian dollar almost reached parity with the US dollar. For US citizens who traveled frequently across the border into Canada, it seemed strange to think of the Loonie as being just the same as a US dollar, since for years it was worth substantially less. Thus if your portfolio was all in US dollar denominated assets, your value fell 40% that year vs. the worlds’s currencies, even though you couldn’t “feel” it unless you traveled abroad or tried to buy imported goods.

Recently, however, this has all turned around. The dollar is soaring vs. most of the world’s currencies, which is good news for travelers and makes imports cheaper. However, those who own foreign stocks are looking at losses regardless of how the underlying stock performs (often many of the underlying foreign businesses IMPROVE when the US dollar rises; for instance Indian outsourcing firms who are paid in US dollars find that this money stretches further when paying their Indian based staff in rupees), just because of the rising dollar.


It is controversial but many central banks are taking steps to effectively debase or reduce the value of their currency in order to keep their export economies competitive. This is essentially the strategy of Japan. On the other hand, some countries are faced with dire circumstances due to the fall in their currencies, which causes inflation locally and can crush banks and those who take out home loans and bank loans denominated in foreign currencies (a surprisingly common overseas practice, although the down side is clearly on display in countries like Russia where a 50% fall in the ruble means that your mortgage just doubled). Some countries like Venezuela and Argentina are in extreme shape and basic goods are not available on the shelves and local manufacturing has mostly seized up; this happens when you stop the flow of dollars outside the country and try to prop up your local currency regime (and lack credibility).

Finally, while everyone thinks the Fed is going to raise interest rates at some point, now we need to think of the impact on the dollar. All else being equal, raising interest rates is going to make the dollar even stronger against its peers, especially as those countries remain in a zero interest rate environment (ZIRP). Given the huge rise that the dollar has already seen, further increases will make exporters even less competitive on the world stage.

I am reading a few books on currency wars and I didn’t realize that the US and Saudi Arabia had an explicit deal where the US provided security as long as the Saudis invested their excess in US Treasury bonds and denominated the world price of oil in dollars and not any other currencies. This gave rise to the term “petro dollars”. While I had heard the term many times I did not realize that this was an explicit not implicit relationship. Even today oil is denominated in dollars, although Putin and the Chinese are working to change that over time with their own bi-lateral relationship (which is running into a rough patch with the fall in the ruble recently, but obviously has long term potential given Russia’s huge resource pool and China’s voracious demand for commodities).

Cross posted at Chicago Boyz

Overall Themes Impacting Stocks during November – December 2014

There has been a lot of activity in the stock market recently. Rather than put this on the top of every post I am going to summarize and then refer to these themes within each individual portfolio update. Here are some of themes that have hit many of the stocks:

– crude oil prices crashed – the price of crude has gone from $90 – $100 / barrel to $60 and under. This impacts oil and gas related stocks in a negative way. It also has some positive effects on goods that (poorer) consumers spend more on, companies like Wal-Mart
– the US dollar rose – many foreign currencies fell against the rising US dollar. This hits all of these ADR’s since they fall when the dollar rises and vice versa. The amount of the impact depends on their currency’s particular performance vs. the US dollar
– geopolitical risks – stocks in Russia and some other hard hit areas have fallen very hard. We don’t have many of these in our portfolio
– tech continues to rise – among all of these items we have had a rally in some US stocks, particularly tech stocks and some other sectors
– dividend yields are valued – since interest rates are low and continue to fall (measured by yields on US treasuries), companies that pay out income (dividends) are (mostly) well valued by the market. Note that it is unusual for dividend yields to be this high relative to US Treasury yields

The question is – are these short term themes or long term themes, or somewhere in the middle? If oil prices have gone down, do you sell now, at their lower valued state? Or will they come back over some (reasonable) period of time.

Portfolio Four Updated October 2014

Portfolios Four and Five are each 5 years old, with the beneficiary contributing $3000 and the trustee $6000, for a total of $9000.  The current value is $10,856 for a gain of $1856 or 20%, or about 5% / year adjusted for the timing of cash flows.  Check the detailed spreadsheet here or on the links to the right.

We will watch the new holdings Coca Cola FEMSA (hit by rising US dollar) and LinkedIn (hit by recent turmoil in internet stocks).  We also have seen some declines lately in oil stocks caused by drops in the price of oil (there are three in the portfolio, Devon, Statoil and Shell).  Finally, Nucor came above our purchase price after years of waiting and has dropped 15% recently on fears of a global slowdown.

Portfolio Three Updated October 2014

Portfolio three is our third longest lived portfolio, at seven years.  The beneficiary contributed $4000 and the trustee $8000, for a total of $12,000.  The current value is $13,638, for a gain of $1638 or 15%, or 3% / year adjusted over the life of the portfolio.  Go here for the spreadsheet detail or click on the link on the right.

The portfolio has almost half turned over in the last year, as 5 new stocks were added, out of the 11 total.  A recent purchase LinkedIn has had some turmoil with the tech stock issues but is a good longer term play, but we will watch it.  We are also watching Weibo, a Chinese internet stock hit by the same tech turmoil.

From the more traditional stocks, Siemens has been hit as the Euro has fallen vs. the dollar recently.  We will also watch Yahoo to see what happens with the Alibaba stock they own post IPO.

Of the stocks we’ve sold, mostly it is good riddance.  In particular Cliffs’ Resources went off a cliff since we sold it, down from $18 to $7.  The stock perhaps could be a good candidate for a purchase in the future as a value play.  We are trying not to ride stocks like that too far down.

Portfolio Two Updated October 2014

Portfolio Two is our second longest lived portfolio, at over ten years.  The beneficiary contributed $5500 and the trustee $11,000 for a total of $16,500.  The current value is $25,036 for a gain of $8536 or 51%, which works out to about 7% over the life of the fund when adjusted for the timing of cash flows.  See the details here or the link on the right.

We will be watching a few stocks.  Transalta has declined and has a dividend that might be unsustainable.  Yahoo went up on the Alibaba IPO and we will watch what they do in the future.  Both Diageo and Siemens have been hit by the fall in the UK Pound and the Euro vs. the dollar and we will keep them on watch as well.

Portfolio One Updated October 2014

Portfolio One is our longest lived portfolio, at 13 years.  The beneficiary contributed $6500 and the trustee $14,500 for a total of $21,000.  The current value is $34,188 for a gain of $13,188 or 63%, which is approximately 6.6% / year.  You can see the portfolio details here or click on the link on the right.

Generally stocks have been in trouble recently so I updated the portfolio to check on everything.  We may put a stop loss on Trans Alta (TAC) soon because it has dropped about 12% in the half year or so that we’ve owned it and they have a high dividend which may be unsustainable (it is currently paying out 6.7%).

Another one to watch is eBay.  eBay has been a good performer and they recently bowed to activist investors and are going to spin out fast-growing PayPal into a separate company.  We may sell or just hold on to PayPal shares depending on how it works.

We will also keep an eye on the Norwegian energy company Statoil (STO).  They had a run up this year but gave it back recently.  They have a good dividend and are in Norwegian currency which provides a hedge against the US dollar but also which falls when the dollar rises (as it has been doing recently).

On Sponsored and OTC ADR’s

In the accounts I attempt to offer a mix of US stocks and foreign stocks, under the theory that most of the world’s economy is outside the USA and for beneficiaries with a long time horizon, it is important to go where the growth of the future will reside.  In addition, this gives us some upside (and downside) if the US dollar rises or declines because foreign currencies do not always move consistently with our dollar.

Generally I have offered as stock selections ADR’s sponsored on one of the major US exchanges, either NYSE or NASDAQ.  These sponsored ADR’s must conform with US accounting rules (called GAAP) and other requirements, such as Sarbanes Oxley, which add additional auditing and compliance costs and supposedly provide offsetting assurances that the financial statements are correct and free from some sorts of defects.

From the perspective of the issuer, the foreign company listing in the USA, this provides additional avenues to reach potential stock holders outside of their local market.  ADR’s are easy for US citizens to purchase because they trade just like US stocks and do not cost extra to purchase, and don’t have any “direct” currency risk because it is always quoted in US dollars (although there is implied currency risk since as the host country’s currency moves against the US dollar, this affects the price).

However, not all firms find it worthwhile to issue ADR’s to reach US stockholders, and many do not want to pay the additional costs to comply with US accounting and regulatory rules.  Thus you cannot purchase many popular stocks, such as BMW, via an ADR that is traded on a major US exchange (NYSE or NASDAQ), because it does not exist.

Another alternative is to buy an “unsponsored” ADR, meaning one that trades on the over-the-counter (or OTC) market, which is also called the “pink sheets”.  OTC stocks can be seen because they have different ticker symbols, usually ending with a “Y”.  The OTC markets have traditionally had a bad reputation because they don’t have the same listing requirements as NASDAQ or NYSE and have been areas of “penny stock scams” and the like for years.

There is nothing inherently wrong with being in the OTC markets, however, and recently one of our ADR’s, Siemens, de-listed from the “sponsored” markets and became an OTC or pink sheet stock.  It received a new ticker symbol SIEGY.  The old stock symbol ticker was SI.  The volume transitioned over seamlessly.  This article, from the Siemens company website, describes the delisting process rationale and how it impacts US stockholders.

1) What is the impact of the delisting of Siemens ADRs from the New York Stock
Exchange (NYSE) on ADR holders?
Until May 15, 2014, Siemens American Depositary Receipt (ADR) facility was a so called
“sponsored Level II ADR program” which meant that Siemens ADRs were traded on the NYSE and
that Siemens was subject to periodic reporting obligations with the U.S. Securities and Exchange
Commission (SEC). Since May 16, 2014, i.e., after delisting from the NYSE, Siemens ADRs are no
longer traded on the NYSE or any other stock exchange in the U.S. This does not mean, however,
that Siemens ADR facility was closed down. To the contrary: Siemens converted its “sponsored
Level II ADR program” into a so-called “sponsored Level I ADR program”. This means that investors
are still able to purchase, sell and trade ADRs, although trading is no longer on-exchange, but solely
off-exchange (over-the-counter).
On May 16, 2014, Siemens filed a Form 15F to deregister its securities with the SEC. As a result,
Siemens reporting obligations were suspended with immediate effect (e.g., Siemens will no longer
be required to submit reports on Form 6-K or annual reports on Form 20-F to the SEC) Siemens
expects that its reporting obligations with the SEC will finally terminate in mid-August. Irrespective of
the delisting, high standards of transparency in financial reporting and first class corporate
governance will continue to be top priority at Siemens.
2) What was the reason for delisting from the New York Stock Exchange (NYSE)?
The goal of the delisting and planned deregistration was to address the change in the behavior of
our investors. The trading of Siemens shares is nowadays conducted predominantly in Germany
and via electronic trading platforms or over-the-counter. Trading volume of Siemens shares in the
USA was low, amounting to significantly less than 5% of its global trading volume in the year 2013.
As a consequence processes of financial reporting are simplified and efficiency is improved.

Thus from Siemens’ perspective, it cost extra money to do US based accounting reports but there was only 5% of its trading volume in the US.  Since the German accounting rules are likely as useful to investors as the US accounting rules, there is little additional risk in a stock such as Siemens moving to the OTC market from the “sponsored” ADR market.

This doesn’t mean that OTC markets aren’t riskier or less regulated than Sponsored markets (like NYSE and NASDAQ) – they are and the instruments that trade there are generally riskier, as well.  In the case of Siemens, however, it likely makes little to no difference.

Depending on your brokerage firm, however, OTC stocks can cost more to buy than listed stocks.  You need to look at the fine print in your statement.  It may involve extra charges or a higher cost / trade.  I am not planning on buying “new” non-sponsored ADR’s as of now but I am interested in seeing how this ADR trades on the OTC markets and what sort of extra fees (if any) that I might encounter when selling it.

Another option is to buy directly in foreign markets.  For instance, my brokerage firm probably would allow me to buy BMW in Euros on the German exchange.  To do this my statement would become more complicated because I would have currency gains and losses and instruments quoted in multiple currencies, the US dollar and Euro (and then this would get more complicated as I added currencies of other countries, such as the British Pound, the Australian Dollar, etc…).  For now I am not doing this but I will watch it and as the costs get further reduced at some point this will be a likely option.

I always learn a great deal by going through brokerage statements and details and noticed the ticker symbol changing on Siemens and then investigating “why”.  I also learned a lot about currency withholding on foreign ADR’s.  I can also see the explicit fees that my brokerage accounting is assessing.  This information has made me a better and more informed investor and I hope to pass these insights on to the beneficiaries of these trust funds.


Currency Returns Since the Crash

It is important to realize the impacts of currencies on the stocks that you select, and your portfolio in total. If you are a US citizen (as are most readers of this blog), then your portfolio of stocks, bonds and cash is essentially “denominated” in US dollars).

The fact that the Australian dollar is up 50% from the 2009 market nadir (against its’ own performance) is compounded by the fact that the US dollar dropped during the last 5 years, for a “net” impact of over 70%. While this is a simplified example, if you just held Australian dollars (plus their implied governmental interest rates), and then transferred them (plus interest) into US dollars at the end of that period, you’d be up 70% on your money (US dollars).

This is important because we have Australian, European, Japanese and ETF’s from other nations in our portfolio.  The fact that the dollar has overall been declining during this period means that stocks held in other currencies have seen their returns boosted in comparison to US dollar investments (like stocks on the NYSE or NASDAQ or US Treasuries).

While there are many reasons why the US dollar has been a poor performer, past performance is not a good indicator of the future, and currency fluctuations are very difficult to predict.  Many people (myself included) have been mystified by the continued strength of the Euro, but the historical returns are undeniable.

When you are selecting stocks, particularly ADR’s which represent stocks traded on foreign exchanges, currency returns may be just as important as stock returns.  When you view the performance of the stock in US Dollars, both the currency returns and the underlying stock performance are “one” number, since the price of the currency is part of the ADR stock price.  To see the impact of the currency, you need to look at underlying performance in the “native” stock market and view this against the price of the ADR in the US market.

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In this case we’ve graphed WBC (the Westpac Banking Corp stock on the Australian Exchange) against the equivalent US ADR (WBK) that trades on the New York Stock Exchange.  You can see how the two stocks mirror each other, with an additional “kicker” on the US ADR because of the decline of the US dollar against the Australian dollar.  If the Australian dollar underperformed vs. the US dollar, these trends would be reversed.  Note that there are many other additional factors to consider including dividends received (WBK is a heavy dividend payer).  With free graphing and analysis tools available at Yahoo and Google and many other sites, it is much easier to do these sorts of analyses and to spot the impact of currencies on your investments.

Foreign Debt Denominated in US Currency

The US has a highly developed corporate debt market. Many large companies issue bonds rather than turning to banks or issuing shares (which dilutes other shareholders, and requires more profits to reach the same EPS), and there are tax advantages, as well.

Other countries are trying to emulate the US and issue debt. However, many buyers of debt in the US do not want the “risk” and hassle of debt denominated in foreign currencies (such as the Indian Rupee). As a result, these companies issue “dollar denominated debt”, which are then used to fund local country operations. US investors will often buy this debt because it seems to not have any currency risk per-se and they offer higher rates than US companies of comparable credit ratings.

However, I noted that this lack of “currency risk” was a mirage, since the issuing company in India still faced the impact of currency changes when they had to convert their local currency into dollars for the interest and principal repayments. The US investors purchasing the debt don’t see these day to day fluctuations, but they cause significant downside risk (if the issuing currency depreciates) without a corresponding upside alternative (if their currency appreciates vs. the US dollar, there is no windfall for the debt buyer, that all goes to the issuing firm).


Prepare to see a lot of trouble as the Indian rupee continues its significant decline vs. the US dollar. Unless the local companies hedged the entire issuance indefinitely (which likely most didn’t and even if they hedged some of it future hedge renewals will be ruinously expensive), they now are effectively paying back a lot more than just the original principal amount to the buyer. The likeliest outcome is a much higher rate of default (or concessions on the part of the buyer) for these loans as the principal becomes due.