Currency ETFs Offer Access To Unconventional Markets

One of the benefits of exchange-traded funds is the abundance of innovative strategies that nearly any investor can now access.  Currency ETFs certainly fall into that category, as access to these markets was previously only available for professional and institutional traders just a few short years ago.  Today there are nearly 40 exchange-traded products that are dedicated to tracking worldwide currencies from Latin America to Europe and Asia. 

The most widely followed of this group is the PowerShares DB U.S. Dollar Bullish Fund (UUP) which has over $665 million dedicated to tracking the daily price fluctuations of the U.S. dollar versus  a basket of foreign currencies.  This basket is collectively made up of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.  It’s worth noting however that the euro makes up 57.60 percent of the portfolio, while the Japanese yen is next in line at 13.60 percent. 

UUP has certainly experienced its share of hardship over the last year and is currently sitting in negative territory for 2014.  Many experts attribute this slow decline in the U.S. dollar to the ultra-low interest rate environment coupled with quantitative easing efforts by the Federal Reserve which has eroded purchasing power compared to other global currencies. 

Most notably the CurrencyShares Euro Trust (FXE) has been steadily increasing in value over that same time frame.  In 2013, FXE gained 3.84 percent and is continuing to strengthen modestly this year as well.

Another currency ETF that has come on strong this year is the CurrencyShares Australian Dollar Trust (FXA,) which tracks the daily price movement of the Australian dollar.  So far in 2014, FXA has gained 5.30 percent and also pays a yield of 1.85 percent. 

According to the fund company fact sheet, The Australian dollar is the fifth most traded currency in the world, accounting for approximately 8.6% of global foreign exchange transactions.  In addition, this ETF is one of the only currency-related funds that pays a monthly distribution to shareholders.

Currency ETFs can be appropriate for investors that are seeking non-correlated returns or access to specific regions that they feel have the potential for a significant change in the forex markets.  They may also be used as a tactical opportunity given shifting global economic data that can influence currency values. 

It is worth noting that these ETFs aren’t suitable for all portfolios, which is why investors that are new to these funds should carefully research the risks and do their homework prior to investing.