ETF Takes Long/Short Approach on Currencies
Last week, a new currency ETF came to market with almost no notice: the PowerShares DB G10 Currency Harvest Fund (DBV).
The fund invests in currencies of the G-10 countries: the euro, yen, Swiss franc, British pound, Norwegian krone, Swedish krona and the Canadian, Australian and New Zealand dollars, but not the greenback, because this ETF is primarily intended as a tool of diversification for U.S. investors. (My colleague
The strategy is to go long the three highest-yielding currencies leveraged 2-1 and to short the three lowest-yielding currencies with no leverage. The idea is that higher-yielding currencies attract capital at the expense of the lower yielders.
The fund tracks the DB G10 Currency Futures Harvest Index, which follows the interest rates of these currencies and boasts an outstanding track record -- it has logged strong performance and low volatility. The average annual return for the index over the past 10 years has been 11.48% vs. 8.32% for the S&P 500, its correlation to the S&P 500 has only been 0.21, and it has less than half the volatility of the S&P 500. Much less volatility, better returns and low correlation are reasons to explore further.I'm convinced that the strategy has merit, but as with all strategies, there are flaws that should be understood before purchasing. Higher yields do tend to make a currency more attractive, but that overlooks an important point: Currencies whose interest rates are moving up tend to be strong. A currency starting from a low base interest rate that is headed higher is likely to be a strong currency, but it could be overlooked by the ETF's strategy. An example of this is the Swedish krona, which I have
|DB G10 Currency Futures Harvest Index
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