Time For A Leveraged Euro ETF?

by on May 20, 2010 | Updated November 8, 2012 | ETFs Mentioned:

It seems like ages ago that the future of the U.S. dollar as the world’s reserve currency was in serious doubt, with the euro being held out as one viable replacement. But with Greece on the brink of a fiscal collapse and several major European economies struggling to reel in ballooning budget deficits, it is the very existence of the euro zone common currency that is in doubt (see Six ETFs To Watch As The Greek Drama Unfolds).

These days, just about everyone has an opinion on the future of the euro. Most are of the belief that a continued slide is likely; BNP Paribas recently projected that the euro will sink to $1.00 by the first quarter of 2011, and several other banks have issued equally grim forecasts (see Three ETFs For Euro/Dollar Parity). And there are signs that euro aversion is beginning to spread, with money managers and central banks joining hedge funds as skeptics of the currency’s viability. “So far during the euro’s months-long descent, attention has been focused on hedge-fund selling of European assets,” writes Mark Gongloff. “But central banks and large managers have a much-larger influence on foreign-exchange markets. Even if they don’t dump euro assets, a mere pause in their buying could weigh heavily on the currency.”

There are, of course, some contrarians out there who suspect that a wave of risk aversion has caused irrational fear of all euro-denominated assets. The euro zone is hardly alone in its uncomfortable fiscal situation; the U.S. government faces a growing debt burden and budget deficit as well. Some investors hoping for a bounce from potential intervention or a short-covering rally are betting on the euro, at least in the very short term [see Actionable ETF Trading Ideas].

Euro ETF Options

The euro’s month-long freefall has been cheered by many in the U.S., as a strengthening dollar has reduced the cost of imported goods. But many ETF investors maintain considerable exposure to the euro through holdings in European equities, an area of exposure that is often overlooked. Because most ETFs don’t hedge out currency exposure, the “euro drag” has exacerbated losses racked up in European equities and fixed income securities (see HEDJ vs. EFA: A Better EAFE ETF? for a closer look at this issue).

Whether looking to hedge the currency exposure built in to international investments, bet on a continued decline, or speculate on a reversal of recent trends, there are a number of ETF options for investors looking to play the EUR/USD exchange rate. In addition to the WisdomTree Dreyfus Euro Fund (EU) and CurrencyShares Euro Trust (FXE), leveraged euro ETFs have seen a major surge in popularity in recent weeks. Below, we profile four ETFs offering a way to gain both long and short leveraged exposure to the euro (see the Leveraged ETF Center for an in-depth look at some of the nuances of leveraged ETFs):

  • ProShares UltraShort Euro (EUO): This ETF seeks to deliver daily investment results equal to 200% of the inverse of the U.S. dollar price of the euro, EUO is up about 32% on the year and has gained approximately 17% over the last month.

  • Market Vectors Double Short Euro ETN (DRR): This exchange-traded note also offers leveraged inverse exposure to the euro, rising approximately 2% for every 1% weakening of the euro relative to the U.S. dollar. Unlike EUO, however, DRR is a senior, unsecured debt instrument issued by Morgan Stanley.
  • ProShares Ultra Euro (ULE): For investors looking to bet on a euro rebound, the counterpart to EUO is an interesting option. This ETF seeks to deliver daily investment results equal to 200% of the U.S. dollar price of the euro, and is currently down about 26% on the year.

  • Market Vectors Double Long Euro (URR): Another option for those bullish on the short term outlook for the euro, URR is also structured as an ETN.

See a list of all euro ETFs (both leveraged and non-leveraged) here. For more actionable ETF trading ideas, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.