Bet Against the Dollar With These Three Currency ETFs
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By: Eric Dutram
April 19, 2012 | Comment(s): 0
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Although the European debt situation continues to dominate the headlines, investors haven’t really seen this transfer over into huge gains for the U.S. dollar. In fact, the greenback—as represented by the U.S. dollar Index—is more or less flat so far in 2012 as smooth trading has dominated the landscape throughout April.
Yet while the dollar has held firm in 2012, many investors remain long term bears on the world’s reserve currency due to America’s many economic issues. Debt levels are quite high at all levels of the American economy—federal, state, personal—and inflation has begun to creep higher in recent months (see Is The Bear Market For Bond ETFs Finally Here?).
Thanks to this, many analysts are advocating that investors position their portfolios to take advantage of the rise of alternative currencies or at least to spread their currency risk around. Unfortunately, this is generally difficult to do in a direct way as it usually requires a futures account or a gamble on the risky forex market where 200% leverage isn’t uncommon.
As a result, investors who are taking a more long-term approach, or are at least trying to remove some of the dollar risk from their portfolio, could be better served by looking at any number of short-dollar currency ETFs. Below, we highlight three of these funds which can all offer a basket approach that bets against the dollar, a strategy that can help investors to profit when confidence in the U.S. is tumbling or at the very least, reduce U.S. investment concentration.
Thanks to this focus and the ultra-low interest rate policy from the Fed, this currency ETF ends up taking a large short position in the greenback. Along with the dollar, the product is also short in yen and Swiss francs, giving a nice mix from a geographic perspective.
In terms of long exposure, three commodity currencies dominate the list. The Norwegian krone, the Australian dollar, and the New Zealand dollar each receive a weighting of at least 30% giving the fund a definite tilt against the American currency.
As a result, the currency ETF looks to be a great way to play future declines in the U.S. dollar relative to other world currencies. This is of course assuming that the Federal Reserve keeps interest rates low compared to other nations and that the product is forced to go short in the dollar outright.
In terms of the fund’s structure, the product does cost investors 75 basis points a year in fees. However, the ETF does see solid volume of 190,000 shares a day and has a market cap over $340 million. As a result, the average bid ask spread is quite small, suggesting low overall trading costs (see more at the Zacks ETF Center).
Currently, the fund has a focus on Asian currencies (42%), although Latin America, Emerging Europe, and Africa/Middle East all take up at least 16% of the fund as well. In terms of individual countries, there are 12 in the basket and all are equally weighted at 8% each (read Emerging Market Currency ETFs: Strong Start to 2012).
This approach could be ideal for investors who want emerging market currency exposure but are having some trouble deciding on a particular nation for investment. With the basket approach of CEW, volatility looks to be curtailed and an issue in a single nation or region will not impact the fund too heavily.
This currency ETF also sees solid volume of about 138,000 shares a day on comparable $325 million in AUM. Investors should also note that this is a relatively low cost choice in the space as the expense ratio is 55 basis points a year. Given this and the high volume, total costs look to be low as the bid ask ratio appears to be smaller than many other products in this space.
In order to accomplish this task, AYT follows an index that holds eight currencies in equal weights, focusing on emerging market nations. The group of countries that have their currencies represented are; South Korea, Indonesia, Malaysia, India, Philippines, Thailand, Taiwan, and China.
Also, investors should note that the product is slightly different than the others on the list due to the ETN structure. This means that the ETF doesn’t actually hold any of its assets and instead is a senior unsubordinated debt security.
Thanks to this structure, there is no tracking error although investors are exposed to the credit risk from the underlying institution. However, the investment is collateralized with short-term U.S. Treasury debt so the product does pay out a modest yield of 1.0%.
In terms of volume, this fund is rather weak compared to the other two on the list, trading just 3,000 shares a day. This coupled with the 89 basis point fee and the ETN structure, produces a fund which has relatively wide bid ask spreads. Thus, this ETN may have higher total costs than other products on the list, though it is arguably the best way to access the Asian growth story from a currency perspective.
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Yet while the dollar has held firm in 2012, many investors remain long term bears on the world’s reserve currency due to America’s many economic issues. Debt levels are quite high at all levels of the American economy—federal, state, personal—and inflation has begun to creep higher in recent months (see Is The Bear Market For Bond ETFs Finally Here?).
Thanks to this, many analysts are advocating that investors position their portfolios to take advantage of the rise of alternative currencies or at least to spread their currency risk around. Unfortunately, this is generally difficult to do in a direct way as it usually requires a futures account or a gamble on the risky forex market where 200% leverage isn’t uncommon.
As a result, investors who are taking a more long-term approach, or are at least trying to remove some of the dollar risk from their portfolio, could be better served by looking at any number of short-dollar currency ETFs. Below, we highlight three of these funds which can all offer a basket approach that bets against the dollar, a strategy that can help investors to profit when confidence in the U.S. is tumbling or at the very least, reduce U.S. investment concentration.
PowerShares DB G10 Currency Harvest Fund (DBV)
While not strictly a ‘short-dollar’ ETF, this fund’s strategy makes it likely to be going up against the greenback on a pretty regular basis. That is because the fund tracks the Deutsche Bank G10 Currency Future harvest Index which looks to go long in developed market currencies that have relatively high yields and take short positions in currencies that have relatively low interest rates (read Commodity Currency ETFs Surge On Global Liquidity Push).Thanks to this focus and the ultra-low interest rate policy from the Fed, this currency ETF ends up taking a large short position in the greenback. Along with the dollar, the product is also short in yen and Swiss francs, giving a nice mix from a geographic perspective.
In terms of long exposure, three commodity currencies dominate the list. The Norwegian krone, the Australian dollar, and the New Zealand dollar each receive a weighting of at least 30% giving the fund a definite tilt against the American currency.
As a result, the currency ETF looks to be a great way to play future declines in the U.S. dollar relative to other world currencies. This is of course assuming that the Federal Reserve keeps interest rates low compared to other nations and that the product is forced to go short in the dollar outright.
In terms of the fund’s structure, the product does cost investors 75 basis points a year in fees. However, the ETF does see solid volume of 190,000 shares a day and has a market cap over $340 million. As a result, the average bid ask spread is quite small, suggesting low overall trading costs (see more at the Zacks ETF Center).
WisdomTree Dreyfus Emerging Currency Fund (CEW)
If investors expect emerging markets to take the lead from the U.S. dollar, a look at a basket of developing market currencies could be an interesting choice. With this approach, investors can tackle a variety of nations around the world which are seeing their economies grow at a rapid rate and are becoming more important in regional trading.Currently, the fund has a focus on Asian currencies (42%), although Latin America, Emerging Europe, and Africa/Middle East all take up at least 16% of the fund as well. In terms of individual countries, there are 12 in the basket and all are equally weighted at 8% each (read Emerging Market Currency ETFs: Strong Start to 2012).
This approach could be ideal for investors who want emerging market currency exposure but are having some trouble deciding on a particular nation for investment. With the basket approach of CEW, volatility looks to be curtailed and an issue in a single nation or region will not impact the fund too heavily.
This currency ETF also sees solid volume of about 138,000 shares a day on comparable $325 million in AUM. Investors should also note that this is a relatively low cost choice in the space as the expense ratio is 55 basis points a year. Given this and the high volume, total costs look to be low as the bid ask ratio appears to be smaller than many other products in this space.
iPath GEMS Asia 8 ETN (AYT)
The economies of Asia are quickly rising in both importance and size thanks to impressive growth rates and booming populations. As a result, some investors may want to concentrate their currency exposure on these surging countries in hopes that their currencies will continue to appreciate relative to the American dollar (see ETFs vs. ETNs: What’s The Difference?).In order to accomplish this task, AYT follows an index that holds eight currencies in equal weights, focusing on emerging market nations. The group of countries that have their currencies represented are; South Korea, Indonesia, Malaysia, India, Philippines, Thailand, Taiwan, and China.
Also, investors should note that the product is slightly different than the others on the list due to the ETN structure. This means that the ETF doesn’t actually hold any of its assets and instead is a senior unsubordinated debt security.
Thanks to this structure, there is no tracking error although investors are exposed to the credit risk from the underlying institution. However, the investment is collateralized with short-term U.S. Treasury debt so the product does pay out a modest yield of 1.0%.
In terms of volume, this fund is rather weak compared to the other two on the list, trading just 3,000 shares a day. This coupled with the 89 basis point fee and the ETN structure, produces a fund which has relatively wide bid ask spreads. Thus, this ETN may have higher total costs than other products on the list, though it is arguably the best way to access the Asian growth story from a currency perspective.
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