Confidence is what gives currencies their credibility. The U.S. dollar went off the gold standard with the Bretton Woods's agreement during the Nixon administration since more dollars were being printed than there was gold to back them (55% to 22%). Taking the U.S. off the gold standard with 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 2008 bear markets, investors started losing faith in the dollar given supply. 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 the forex (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 energy ETPs. It's essential to have exposure to these new instruments to hedge against dollar destruction not to mention exposure to gold. 

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 support@ETFDigest.com and we'll attempt to satisfy your interest.


Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity


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
Decent liquidity


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

 

Whereas our previous technical analysis methodology involved 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 years and remaining sanguine about this sometimes aren't an option. Therefore, it pays to be active and utilize a combination of weekly and daily technical charts to manage risk. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

ProShares features inverse and leveraged long/inverse ETFs for those investors wishing to hedge or speculate.

#1: PowerShares DB USD Index Bullish & Bearish ETFs (UUP) (UDN)

UUP/UDN (PowerShares/DB USD Index Bullish & Bearish ETFs) 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 $1.5 billion million (UUP) and $114 million (UDN).

Average daily trading volume is 6.2M shares (UUP) and 114K shares (UDN). As of mid-December 2011 the YTD return was -1.60% (UUP) and -.26% (UDN). Variations are due to contract rollover trading variations and open market speculation which can become inefficient.

#2: Rydex CurrencyShares Euro Trust ETF (FXE)

 

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 $579 million and average daily trading volume is over 2M shares. As of mid-December 2011 the YTD return was -1.07%.

Leveraged long and short issues are available from ProShares.

#3: Rydex CurrencyShares Japanese Yen ETF (FXY)

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 $697 million and average daily trading is 390K shares. As of mid-December 2011 the YTD return was 3.86%.

Leveraged long and short issues are available from ProShares.

#4: Rydex CurrencyShares British Pound Sterling ETF (FXB)

 

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 $100 million and average daily trading volume is 53K shares. As of mid-December 2011 the YTD return was -.75%.

#5: Rydex CurrencyShares Swiss Franc ETF (FXF)

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 $454 million and average daily trading volume is less than 213K shares. As of mid-December 2011 the YTD return was -.79%.

Abruptly in the late fall the Swiss decided to peg their currency to the euro. This was done to arrest the rapid rise in the franc and to assist borrowers in Eastern Europe to paying back franc denominated loans.

#6: Rydex CurrencyShares Swedish Krona ETF (FXS)

 

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-December 2011 the YTD return was -1.67%.

 

#7: Rydex CurrencyShares Canada ETF (FXC)

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 $574 million and average daily trading volume is 253K shares. As of mid-December 2011 the YTD return was -2.49%.

#8: Rydex CurrencyShares Australia ETF (FXA)

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 $758 million and the average daily trading volume is 425K shares. As of mid-December 2011 the YTD return was 2.21%.

#9: PowerShares DB Currency ETF (DBV)

 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. The fund was launched in September 2006. The expense ratio is .75%. AUM equal $360 million and average daily trading volume is 238K shares. As of mid-December 2011 the YTD return was .00%.

#10: Wisdom Tree Dreyfus Emerging Currency Fund (CEW)

 

CEW 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 $374M and average daily trading volume is 275K shares. As of mid-December 2011 the YTD return was -7.49%.

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.

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.

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. 

For further information about portfolio structures using technical indicators like DeMark and other indicators, take a free 14-day trial at ETF Digest . Follow us on Twitter and Facebook as well and join our group conversations.

You may address any feedback to: feedback@etfdigest.com   

The ETF Digest is long UUP.

(Source for data is from ETF sponsors and various ETF data providers)

 
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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