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Confidence is what gives currencies their credibility. The U.S. dollar went off the gold standard with the Bretton Woods agreement during the Nixon administration. This was done because more dollars were being printed than there was gold to back them (55% to 22%). Taking the U.S. off the gold standard, the BW agreement made the dollar the world's reserve currency. This meant many commodities were priced in dollars. Some currencies were permitted to float freely while others maintained a "currency peg" to the dollar. As of late 2011, the U.S. dollar is still nearly 70% of foreign reserve holdings.
With expansionary dollar monetary policies post the 2001 and then 2008 bear markets, investors started losing faith in the dollar given supply. And, this sentiment was transferred later to other fiat (paper money) currencies in general as 2011 eurozone debt issues surfaced. For U.S. citizens, purchasing power is being lost and investors look to foreign exchange to hedge their dollar exposure or speculate in markets. ETPs (ETF/ETN) have emerged as an easier, less complicated and less leveraged manner to participate in these markets.
As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator), I know the value of having an allocation to direct currency ETPs. It's essential to have exposure to these new instruments to hedge against dollar destruction not to mention exposure to gold.
Whereas our previous technical analysis methodology involved using evaluating monthly charts, commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Most futures contracts to which ETPs are linked expire quarterly. To be effective, direct commodity investing requires investors to be more active although investors in gold in particular view the asset now as a long-term hold.
Nevertheless, a willingness to trade with the trend long or short, or even being on the sidelines at times, is from our view prudent and potentially more profitable. We do this because we've seen large price changes over the past and remaining sanguine about this sometimes isn't a good option. Therefore, it pays to be active and utilize a combination of weekly and daily technical charts to manage risk.
Simplistically, we recommend longer-term investors stay on the right side of the 12-month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high. However, this is not our approach.
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For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from
and where available these are noted.
#10: Wisdom Tree Dreyfus Emerging Currency Fund
The Fund seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. Since the Fund's investment objective has been adopted as a non-fundamental investment policy, the Fund's investment objective may be changed without a vote of shareholders. The fund was launched in May 2009. The expense ratio is .55%. AUM equal $342M and average daily trading volume is 145K shares. As of mid-March 2012 the YTD return is 6.70%. The one year return is .87%.
Constituent currencies at launch: Mexican Peso, Brazilian Real, Chilean Peso, South African Rand, Polish Zloty, Israeli Shekel, Turkish New Lira, Chinese Yuan, South Korean Won, Taiwanese Dollar, and Indian Rupee.
#9: PowerShares/DB Currency ETF
DBV follows the Deutsche Bank G10 Currency Future Harvest Index - Excess Return follows the Index is comprised of currency futures contracts on certain G10 currencies and is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates. In other words, it's basically a long/short strategy designed to produce income.
The fund was launched in September 2006. The expense ratio is .75%. AUM equal $384 million and average daily trading volume is 166K shares. As of mid-March 2012 the YTD return is 6.65%. The one year return is 11.98%.
#8: Rydex CurrencyShares Australia ETF
FXA follows the continuation futures contract of the Australian Dollar with an occasional use of interbank market positions. The fund was launched in June 2006. The expense ratio is .40%. AUM equal $721 million and the average daily trading volume is 259K shares. As of mid-March 2012 the YTD return is 3.89%. The one year return is 11.46%.
#7: Rydex CurrencyShares Canada ETF
FXC follows the interbank and futures continuation contracts of the Canadian Dollar which constitutes roughly 9% of the Dollar Index. The fund was launched in June 2006. The expense ratio is .40%. AUM equal $581 million and average daily trading volume is 81K shares.
As of mid-March 2012 the YTD return is 2.71%. The one year return is -.43%.
#6: Rydex CurrencyShares Swedish Krona ETF
FXS follows futures continuation contracts and interbank market strategies to meet the trends of the Swedish Krona which represents roughly 4% of the Dollar Index.
The fund was launched in June 2006. The expense ratio is .40%. AUM equal $89 million and average daily trading volume is less than 15K shares. As of mid-March 2012 the YTD return is -7.77%. The one year return is -5.73%.
#5: Rydex CurrencyShares Swiss Franc ETF
FXF follows the continuation contracts of the Swiss Franc as traded on various futures exchanges. The fund was launched in June 2006. The expense ratio is .40%. AUM equal $429 million and average daily trading volume is less than 84K shares. As of mid-March 2012 the YTD return is 2.47%. The one year return is -2.29%.
Abruptly in the late fall the Swiss decided to peg their currency to the euro for intra-Europe trading reasons. This was done to arrest the rapid rise in the franc and to assist borrowers in Eastern Europe to paying back franc denominated loans. This decision has rendered the franc useless as a trading vehicle since you would do just as well to follow the euro.
#4: Rydex CurrencyShares British Pound Sterling ETF
FXB follows the continuation contract of the British Pound which accounts for nearly 13% of global foreign exchange transactions. When favorable the fund can also earn interest on T-Bills used as collateral for futures contracts.
The fund was launched in June 2006. The expense ratio is .40%. AUM equal $86 million and average daily trading volume is 51K shares. As of mid-March 2012 the YTD return is 1.12%. The one year return is -2.15%.
#3: Rydex CurrencyShares Japanese Yen ETF
FXY follows the continuation contract of Japanese Yen futures contracts. Interest can also be earned on T-Bills deposited as collateral to hold these futures contracts. The yen represents the second highest percentage of the Dollar Index at 13.7%. The fund was launched in December 2007. The expense ratio is .40%. AUM equal $270 million and average daily trading is 365K shares.
As of mid-March 2012 the YTD return is -7.77%. The one year return is -5.73%.
Leveraged long and short issues are available from ProShares.
#2: Rydex CurrencyShares Euro Trust ETF
FXE follows the euro which is the currency of 17 European Union countries. The Euro system consists of the European Central Bank (ECB) and the national central banks of the 17 countries belonging to the euro area is in charge and implementing monetary policy for the euro zone. It accounts for approximately 57% of the Dollar Index making it a major world currency.
The fund was launched in December 2005. The expense ratio is .40%. AUM equal $414 million and average daily trading volume is over 1.4M shares. As of mid-March 2012 the YTD return was 1.68%. The one year return was -5.93%.
Leveraged long and short issues are available from ProShares.
#1: PowerShares / DB USD Index Bullish & Bearish ETFs
(UUP) & (UDN)
UUP & UDN follow the same Deutsche Bank Dollar Index with one ETF allowing investors to invest in a long position (UUP) while the other (UDN) allows investors to invest in a short position on the same index. The Dollar Index is comprised of the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The funds were launched in February 2007.
The expense ratio is .50%. AUM (Assets under Management) equal $1.2 billion million (UUP) and $91 million (UDN). Average daily trading volume is 4M shares (UUP) and 142K shares (UDN).
As of mid-March 2012 the YTD return was -1.29% (UUP) and one year return 1.65%. YTD (UDN) was .00% and one year return -3.91%.
We rank the top 10 ETF by our proprietary stars system as outlined below. If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to
and we'll attempt to satisfy your interest.
Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity
Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average
Currency ETFs present a noncorrelated opportunity for investors to diversify their portfolios. The above represent, with the exception of CEW, the more established currencies trading now. As you can readily see increased volatility in 2011 has disrupted more established trends especially occasioned by debt problems within the euro zone.
Even more deadly and unproductive for traders have been so-called "Currency Wars" whereby countries are more than willing to intervene to drive down the value of their currencies to abet exports.
It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Charles Schwab's ETFs and Scottrade's Focus Shares which both are issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned.
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The ETF Digest is long UUP.
(Source for data is from ETF sponsors and various ETF data providers)
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