Sunday, July 11, 2010

International Trading and Currency Risks

A reader wanted to know the name of the broker that I use to buy securities on the Toronto exchange. I use Fidelity, but some other online brokers have this service also. More information about international trading at Fidelity can be found at Fidelity Investments.

I have limited my purchases to securities trading on the Toronto exchange so far. The commission is $19 Canadian. The symbols used for trading are different than the ones that I have referenced in previous posts which originate from Yahoo Finance. At Fidelity, the symbol for the Claymore ETF for 1-5 year Canadian Government bonds is CLF:CA. I have bought 400 shares of that ETF with part of my Canadian dollar position. BOUGHT 200 CLF:TO AT 20.20 CAD Added 100 CLF:TO-Sold 100 CPD:TO Sold HSE:TO at 30.48 CAD/Bought 100 of ETF CLF:TO at 20.10 CAD

I also own the Claymore ETF for 1-5 Year Canadian Corporate Bonds, and the Fidelity symbol is CBO:CA (CBO.TO at YF). Bought 100 CBO:TO at 20.4 & 100 CPD:TO at 16.09 By buying these and other securities on the Toronto exchange, I receive my dividend payments in Canadian dollars after a 15% withholding tax. This tax is paid irrespective of whether I buy the security on the Toronto exchange or the ADR on a U.S. exchange using U.S. dollars. If I buy the ADR using USD, I will receive the dividends paid in Canadian dollars in USDs after a conversion at the then prevailing exchange rate. Since I am a long term holder of CADs, capable of holding them for as long as I live, I prefer to receive the dividends in CADs to increase my position in this currency over time.

I am exposed to currency risk irrespective of whether I buy the ADR or the original shares on the Canadian market. I do not believe that most individuals understand the currency risk issue when they buy non-hedged international stock or bond funds, or individual foreign stocks and bonds. I do not avoid that risk by buying NYSE listed ADRs.

In several prior posts, I show how the ADRs track the share price of the original shares in the main foreign exchange for the company. I used several examples, including ADRs for companies based in France, Switzerland and Australia. Bought 100 AXAHY at 14.69 (EURO) ADDED 50 NABZY AT 19.51 (National Australia Bank (AUSTRALIAN DOLLAR); Added 70 RHHBY at 34.07-Completing Round Lot/ Swiss Franc-Euro (SWISS FRANC); Bought 100 NVS at 49.08 (SWISS FRANC); see also, Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas).

I recently bought an ADR for Manulife (MFC). Bought 100 MFC at $15.05 I could have bought shares on the Toronto exchange, but elected to buy the ADR. I wanted to use my CADs to buy more of the Canadian Government bond ETF. I will receive dividends for MFC in U.S. dollars after conversion from the Canadian currency and the 15% reduction for the Canadian tax. (I let TurboTax deal with the foreign tax credit issue). But the price of my ADR shares will be linked to the ordinary share price in Toronto adjusted for currency exchange.

I wanted to highlight the currency issue for MFC which I did not discuss when I purchased shares. To do this comparison, I will take the price of MFC at a time when the Canadian dollar was weak compared to the USD. I pulled up a long term Chart of FXC, the currency ETF of the Canadian Dollar, and I see some weakness on 3/2/2009. I then pulled up a chart on the ADR MFC and found a USD price of $7.49 Chart The price close Friday at $15.31 for a gain of about 104%. The Canadian shares closed 3/2/09 at 9.65, MFC.TO, and at 15.8 last Friday for a gain of almost 64%. The difference between the ADR and ordinary share appreciation, which is very large, is the currency exchange factor, as the CAD has rallied against the USD since 3/2/09. The Canadian dollar will buy $.9674 on 7/9/2010, whereas it would buy only $ .7769 on 3/2/2009: CAD/USD Chart Until an investor understands the currency risk completely, they are unable to evaluate the risk and whether or not they want to assume it.

Now, I could have reached the same result as buying the ADR MFC by converting my USDs into Canadian dollars when the USD was strong on 3/2/09 and then buying MFC on the Toronto exchange. Then if I sold those ordinary shares, and converted the proceeds back into USDs, I would have received the same appreciation on the shares as the Canadian buyer on the Toronto exchange plus the currency appreciation of the CAD vs. the USD, minus the fees for converting both ways which would eat into the overall return some. Those fees are one reason to keep my CADs in Canadian dollars and to take my dividends and interest payments from Canadian securities in Canadian dollars.

Possibly, I would consider converting them back when and if 1 CAD would buy $1.25 USD. Otherwise, I am satisfied in trying to earn some kind of return on my long term CAD position.

For many individual investors, purchase of the ADR will be a satisfactory option for foreign stock exposure. I recently bought ADRs for Roche, Novartis, and Sanofi. A large institutional investor wanting to buy Roche shares would most likely look to acquire those shares in Zurich due to liquidity considerations. The Roche ADRs trade on the pink sheet exchange in the U.S. with relatively low volume. RHHBY Roche Holding Ltd: Also I do not believe Zurich is one of the 8 foreign exchanges where I can place trades. Otherwise, I would consider buying Swiss Francs to make purchases in Switzerland. I am more willing to accept currency risk from owning shares priced in Swiss Francs, Australian Dollars, Norwegian Krone, and Canadian Dollars, than any other developed market currency. But, I am not going to overdue it anywhere outside the U.S. due to currency risk considerations among other reasons. Most of my assets (90+%) are in USDs. I just do not want 100% in USD.

One reason that I bought the Claymore Canadian ETFs on the Toronto exchange is the transparency, volume and the low bid/ask spread. When I bought the shares of CLF:TO (CLF:CA at Fidelity) on Friday, the bid was 20.19 and the ask was 20.21. I placed a limit order to buy 200 at 20.20 which was immediately filled. My alternative was to purchase this security on the U.S. Grey Market using USDs. I would assume that any U.S. based broker allows for trades to be placed on the pink sheet market in its various forms: OTC Market Tiers, OTCQX, Pink Quote/OTCBB, OTCBB, Pink Sheets, Grey Market, Caveat Emptor

I prefer to avoid the Grey Market unless I want to buy a security and have no other choice. There is no transparency. There is either no volume or immaterial volume on most of the securities traded in the Grey Market. The bid/ask is not even displayed. There are no market makers, and no rules to speak of as far as I can tell. Forget about best order execution in the Grey Market. I have seen buy orders for a security filled at $15.5 when I was trying to buy at $16 and was not filled. Limit orders are therefore essential, and I would have to convert the Canadian price into U.S. dollars to even have an idea of where to place my limit order.

For example, CLF:TO closed Friday at 20.21: CLF.TO: Summary for CLAYMORE 1-5 YR LADDER GOV T BONDS. The Grey Market price for this security was $19.3341 with the last trade on 7/6/2010: CLFMF Claymore 1-5 Year Laddered Government Bond ETF: Summary As of 7/6/2010, the equivalent price in CADS would be around 20.40 CAD for $19.33 USD. Currency Converter

I would have to do a different calculation to know where to place my limit price for CLFMF on Monday. I would have to take the exchange rate at the time of my bid using the current share price information of the shares traded in Toronto. On Sunday, 7/11, using the closing prices of the shares on Friday of 20.21 CAD, and the current exchange rate, the equivalent price would be $19.58 USD. Currency Converter This will change on Monday some as the price of the Toronto shares change as well as the conversion rate. But after doing all of that work, and doing it right, I will most likely not receive a fill of an order in the U.S. Grey Market. So, most of the time, I do not bother with it.

For the shares that I have purchased on the Toronto exchange, Fidelity will show me the value in both Canadian dollars and U.S. dollars. The Canadian dollar price is from the Toronto exchange. It would not be unusual to see a fall in price in Canadian currency and a rise in the USD value or vice versa. This is a real time lesson in currency risk that an owner of the ADR will not see until they put pen to paper and do the calculations. The risk is still there for the ADR but is not graphically displayed in the same manner.


  1. I seem to recall a post in which you discussed differences between grey market ADRs (e.g. wxyzy) vs. foreign shares (usually designated abcdf). I've been unable to find that post but if you recall, please post link if you wouldn't mind.

    The Isreal fertilizer/chemical company M.A. Industries has two Yahoo Finance symbols maixy and maixf and China Chemical offered 22.7 shekels a share. At a conversion rate of .2721 and assuming the deal goes through, maixf could be around 6.18/shr in USD. It was trading around 4.80 a couple days ago and hardly has any volume. It moved to 5.08 today but has almost zero liquidity.

    At any rate, my main motivation for this post was to see if you recall your discussion of foreign shares bought on American exchanges vs. ADR's.


  2. I read about this acquisition but am not familiar with the company. I do know that the grey market is totally lacking in any transparency. The bid and ask quotes are not disclosed. If you enter an order to buy 100 at $5, it could be sent to a broker who does not display it. There are no market makers. A order to sell 100 by another customer then might get filled at 4.5, even though you have the better offer, just because it is sent to another broker and matched only with their best bid.

    I do not recall the post that you are referencing. I discuss in several posts how currency exchange impacts the pricing of ADRs and the foreign traded shares priced in the local currency. It does not matter whether you buy the ADR or the foreign shares directly, both should be priced the same for the U.S. citizen buying with USD, unless there is a serious and usually temporary mispricing issue, which I have seen occasionally. I believe that I saw it with the pink sheet listed AXA shares once.

    Most of my discussion in this area focus on buying foreign companies when the share price has fallen significantly and the U.S. dollar is relatively strong against the currency in the host market. The buy of AXA would be an example.

    I looked at MAIXF and did not see whether there was a 1 to 1 conversion with the shares traded in Israel. If I was going to trade this, and I will need a far, far, far more powerful incentive than this to try and execute a trade on the grey market, I would start by being certain what those MAIXF's shares represent in relation to the Israel traded shares. If I have the right company, the Israel shares use the symbol
    Main.TA at reuters closing at 1825 on 11/16. I do not see how that connects back.

  3. I want to thank you for your response.

    Just to put a bow around the M.A. Industries part of these comments. Isreali stocks are listed in the "New Isreali Shekel" (.01 NIS) denomination, hence the price listed as 1825 on 11/16 is the equivalent of 18.25 shekels (18.25 shekels multiplied by an exchange rate of .2721 = $4.966/shr for those foreign shares listed on the pink sheets).

    At an offer price for the company of $2.72 billion dollars and 459.26M outstanding shares, it seems the share price of those foreign shares could move to $5.92 assuming the deal goes through at that price. However, this is a moot discussion as the price seems to be tracking efficiently at this point.

    My question was motivated around whether those foreign shares (as opposed to the ADR) listed/traded on the pink sheets were pegged to shares, or actually ARE the shares listed on the Tel Aviv stock exchange, or whether some mispricing could take place of those foreign shares due to the illiquid nature of the exchange they're traded on. I now believe those foreign shares designated MAIXF ARE the shares traded on the TA stock exchange.

    Thanks again.

  4. Thanks for the information on how shares are priced on Israel's exchange. I do occasionally buy their companies and own a couple now.

    I suspect that the grey market listed shares are the ordinary shares. Generally, the pink sheet exchange will tell you whether the shares are an ADR and then provide the conversion rate. In the case of MAXIF, the listing just says ordinary shares. I would equate that with the Israeli shares so there should be good tracking in a liquid market. The Grey Market is not a liquid market by any stretch.

    When I buy Canadian stocks, I will generally buy them directly on the Toronto exchange using Canadian dollars. One such security, since sold, is a company called Viterra, now trading at 9.35 CAD on the Toronto exchange. It has a listing on the pink sheet exchange under the symbol VTRAF with the reference "ordinary" shares. The last trade at that exchange was $9.09 USD and that is close to the Toronto price using the current exchange rate.

    The pink sheet listing for Roche, another security that I have bought on the pink sheet exchange, has the symbol RHHBY. The pink sheet exchange clearly calls this one an ADR with a ratio of 1 ADS=.25 ordinary.