Dove or Ivory? A Case Study on Currency Impacts

Let’s analyze how this relationship worked for UNA over the past year. While UNA’s stock price has appreciated 41.0% cumulatively over the past year, the ADR price has appreciated only 9.0%.⁵ Why? The euro’s exchange rate versus the U.S. dollar depreciated 23.5% over this period; the ADR’s appreciation was thus significantly mitigated by the euro’s depreciation. It should be clear from this example that UNA’s ADRs trading in the United States were still impacted by the euro’s exchange rate, despite the ADRs being traded in the United States.

Moreover, as the euro declined and the U.S. dollar strengthened, P&G returned only 3.6% over the period—showing how Unilever performed quite well (up 41.0%) and strong in its local currency when compared to P&G. We believe this type of strong relative performance is an example of how European exporters can serve as a good diversifier to U.S. exporter exposure during periods of U.S. dollar strength—assuming the investor is hedging currency exposure.

Many assume that because ADRs trade in U.S. dollars in the United States, they eliminate currency risk. Because of the way ADRs are structured, they still contain currency risk, as we illustrated. For those looking to hedge the currency risk within their foreign stocks, ADRs are no substitute for strategies that employ a specific currency-hedging program.

¹Procter & Gamble had a 1.53% weight in the WisdomTree Dividend Index, a 3.11% weight in the WisdomTree Equity Income Index and a 1.84% weight in the WisdomTree LargeCap Dividend Index as of 3/12/15.
²Unilever NV had a 4.74% weight in the WisdomTree Europe Hedged Equity Index as of 3/12/15.
³This assumes neither company is undertaking its own currency hedging.
⁴Source: The Procter & Gamble Company, Q2 2015 fiscal year earnings press release, 1/27/15.
⁵Sources: WisdomTree, Bloomberg, 3/12/14–3/12/15.