You could buy VWAGY, trading today, April 5, at $37.00, up 4.27% or you could buy VWAPY at $29.27, up 2.92%. (A search for VW ticker will discover another 21 symbols on various European exchanges but for U.S investors these two ADRs are the major choices.
Both are ADRs (American Depositary Receipts) on Volkswagen’s German shares. But there’s a considerable difference between these two ADRs. For example, on April 5 VWaGY showed an average daily trading volume of 1.34 million shares. VWAPY, on the other hand, showed an average volume of just 232,327 shares.
So what’s the difference?
It all goes back to 2008 when Porsche SE tried to take over Volkswagen. The battle that ensued ended with VW taking over Porsche’s car-making unit, Porsche AG, and with an investment company, Porsche Automobile Holding SE owning roughly 53% of VW’s ordinary shares.
Those ordinary shares are what the VWAGY ADRs track. But there’s also a class of shares, called “preference shares” that is tracked by the VWAPY ADRs.
The very name “preference shares” generates part of the confusion. Like U.S. preferred shares, this class does confer certain “preferred” rights on matters such as dividends. (The ordinary shares pay a dividend of 0%; the preference shares pay a 2.01% dividend) On the other hand, preference shares don’t come with any voting rights. Those belong to the holders of the ordinary shares
The major difference, however, and the reason for the current price difference, is the liquidity of the two classes of shares. The VWAPY ADRs–and the preference shares–are way more liquid. The VWAGY shares, on the other hand, have a very small free float. Besides the 53% owned by Porshe SE there’s an additional 20% stake owned by the state of Lower Saxony, and a 17% stake owned by the Qatar Investment Authority. Because of the limited supply of ordinary shares, they tend to trade at a premium to the preference shares. In essence you’re paying for the scarcity value of the ordinary shares.
And you’re also paying for hedge funds who use arbitrage strategies of buy shares in the investment company Porsche SE and sell short the VW ordinary shares. With the price of the VW ordinary shares climbing recently, the Wall Street Journal recently argued, some of the hedge funds short the ordinary shares may have been forced to cover their short positions, leading to gains in the ordinary shares.
Historically, however, the preference shares have traded at a higher price than the ordinary shares. Which leads to a suspicion that buying the ordinary shares ADR VWAGY at the current premium to the preference shares ADR VWAPY might just be paying a temporarily higher price that’s a result of hedge fund strategies.
For 2021 to date, as of the close on April 5, the ordinary shares ADR VWAGY has gained 78.2%. The preference shares ADR VWAPY is up 57.1%.
(You could also “buy” Volkswagen by buying shares of Porsche’s investment company, Porsche Automobile Holding SE, which holds 53% of Volkswagen’s ordinary shares. The ADR for the Porsche holding company is POAHY. It closed today, April 5, at $11.32, up 2.35% on the day. This ADR is up 61.6% since the start of 2021.)
I do want to own shares of Volkswagen in my long term 50 Stocks Portfolio on the company’s big move into electric cars. I’d prefer not to pay a premium for less liquidity or as a result of any hedge fund short covering. (And I always like a dividend.) So as of tomorrow April 6, I’m adding the Volkswagen preference shares ADR, VWAPY) to my 50 Stocks Portfolio.
