What’s the appeal of currency-hedged single-stock ETNs?

One of the frustrations of being a South African investor is that the second the main world inventory markets in America, UK and Europe crash, the rand tends to weaken dramatically.

This is as a result of developed markets (DMs) crash when it’s ‘risk off’, and the ‘risk off’ surroundings additionally implies that rising markets (EMs) are being offered and capital flowing out of them.

Thus, in case you are sitting on money and trying to purchase into DM markets when shares are low-cost, or cheaper, you could have already externalised the rands into US {dollars} (or one other exhausting forex) and had the self-discipline to take a seat on the money (incomes subsequent to zero curiosity) and wait …

But there’s now an alternate: currency-hedged single-stock exchange-traded notes (ETNs).

In abstract, ETNs are exchange-traded notes which are listed on the JSE. Because they’re listed on the JSE, anybody should buy them.

In the FNB instance, you don’t want to be a consumer of FNB.

Each one attaches to the financial institution’s stability sheet with the financial institution guaranteeing the underlying inventory, which on this case is a single giant cap – or international exchange-traded fund (ETF) – listed elsewhere in the world.

Unhedged vs hedged 

Importantly, FNB affords two varieties of these single-stock ETNs: an unhedged forex model (denoted by the six-letter JSE code ending in a ‘C’), and a currency-hedged model of the identical ETN (ending in a ‘Q’).

The unhedged ETNs transfer based mostly on the change in the rand trade price and the change in the underlying single inventory they’re monitoring.

Buying them is akin to sending your cash offshore.

The hedged ETN, nonetheless, strikes based mostly solely on the change in the underlying single inventory and acts as in case your capital has already been despatched offshore.

I’m certain you’re beginning to see the place that is going …

Devaluing rand

The rand is quick approaching the R19/$1 stage, and regardless of some of the enticing valuations beginning to seem in offshore markets, this sturdy forex devaluation will damage your spending energy when sending cash offshore to purchase international shares.

In this manner, shopping for unhedged single-stock ETNs shall be locking on this weaker forex, and we may have a state of affairs the place markets get well (‘risk on’) and the rise your underlying share worth is greater than offset by rand power.

On the different hand, at these ranges, shopping for the hedged single-stock ETN acts as if you will have already despatched your rands offshore and are ready patiently in US {dollars}!

Thus, if markets rally with a risk-on sentiment shift, your investments right here will rally with the underlying inventory and ignore any power in the rand.

The reverse might occur although: the risk-off might worsen, the rand weaken, and world markets tank additional. In this case, the hedged ETN could have no depreciating rand buffer to cushion your losses.

That mentioned, I’m simply highlighting this selection for individuals who have an interest.

In investing, as in life, the extra choices one has the higher.

Here is a listing of the hedged single-stock ETNs that FNB affords and their corresponding codes taken from its web site beneath Exchange-traded notes (I’ve constructed this listing manually, so please double-check the accuracy by referring to FNB’s web site).

* Keith McLachlan is funding officer at Integral Asset Management.