Single-stock ETF boom heats up with overseas bets

The single-stock ETF frenzy is going global, with a new bid to launch products that give US traders a way to bet directly on overseas companies — without fretting about currency risk.

Precidian Funds last week filed to introduce 18 exchange-traded funds, each of which will hold American depositary receipts for one company based outside the US, including Toyota Motor Corp., AstraZeneca Plc, HSBC Holdings Plc and Novo Nordisk A/S. 

The ETFs, if greenlit by the US Securities and Exchange Commission, will use currency swaps to try to protect against the exchange-rate fluctuations that come with traditional ADR investing, and also offer performance that generally corresponds to the total return of the underlying stock in its local market. ADRs give US investors exposure to companies abroad, and also help those firms gain access to American capital markets. 

The Precidian product would tap into the phenomenon of single-stock ETFs, which have amassed roughly $13 billion in the US since their debut two years ago, Bloomberg Intelligence data show. It underscores how Wall Street issuers are taking ever-more aggressive steps to stand out among the thousands of funds in the burgeoning $9.5 trillion US ETF ecosystem. 

“What we are trying to do is to make it easy for US investors,” said Stuart Thomas, founding principal of Precidian Investments. “We focused on the largest, most liquid, most widely owned securities because if we’re going to give people a choice, it should be a choice of things that they are interested in.” 

There are more than 2,000 US-listed ADRs, according to BI, although many don’t trade regularly. In a sign of growing interest in the product, an S&P Dow Jones Indices gauge of ADRs indicates volume in the sector is up almost a third relative to before the pandemic.

For Precidian Funds, a wholly owned subsidiary of Precidian Investments, the target market encompasses institutional money managers as well as individual investors. The Newtown, Pennsylvania-based firm says the products are the first of their kind.

ETF Innovation

Precidian was in the spotlight in 2019 when American regulators approved its structure that allows nontransparent ETFs, which don’t have to reveal their investments daily. Its principal business model involves developing intellectual property and licensing it to other asset managers. The ADR-tied ETFs would be a new endeavor for the firm, which currently has no assets under management. 

“It’s an interesting concept if you have a strong conviction on a single name and don’t have the means to trade it locally (IE you live in the US, but can’t buy a European name),” Todd Sohn, an ETF strategist at Strategas Securities, said in an email. “They are kind of like a cousin to FX-hedged ETFs and single-stock ETFs.”

Sohn cited the WisdomTree Japan Hedged Equity Fund (ticker DXJ) as an example. The $3.5 billion fund invests in a broad array of Japanese stocks while hedging out fluctuations in the yen.  

The Precidian approach, he said, may appeal to those who want a more targeted investment, rather than broad exposure to a country’s stocks.

“Right now, you are forced to take the stock and the currency,” said Jeremy Schwartz, global chief investment officer at WisdomTree. “In a way, this lets people get more specific with the calls they want to make.” 

The question is how much US domestic demand there will be for a product focusing on overseas shares. 

After all, most of the money in the global ETF universe is flowing toward funds that give exposure to American markets, according to data compiled by BI’s Athanasios Psarofagis. US-linked funds absorb roughly 65% of flows annually, compared with 13% for Europe and around 20% for the Asia-Pacific.

It’s “a novel concept,” said Jane Edmondson, head of thematic strategy at TMX VettaFi, an ETF index provider and marketing platform. 

She’s curious, however, to see whether investors embrace the product, in part because they may not actually want to hedge out currency exposure.