WisdomTree rolled out the latest addition to its currency ETF lineup today, launching the Dreyfus Commodity Currency Fund ETF (CCX). The new fund will seek to match total returns reflective of money market rates in selected commodity-producing countries and changes to value of such countries’ currencies relative to the U.S. dollar. At launch the fund’s exposure consisted of eight currencies, split evenly between developed and emerging markets. The emerging market currencies include the Brazilian real, Chilean peso, Russian ruble, and South African rand. The developed market currencies include the Australian dollar, Canadian dollar, Norwegian Krone, and New Zealand dollar.
Each of the component currencies is linked to an economy in which commodities account for a significant portion of exports. Currently, the countries represented include the world’s largest exporters of gold, silver, nickel, natural gas, sugar, zinc, coal, iron ore, aluminum, and livestock. Noticeably absent are currencies from Middle Eastern countries that account for a significant portion of global oil exports. Because the Saudi riyal and other currencies of oil-rich nations don’t float, they aren’t eligible for inclusion in the basket.
Although CCX represents the debut of this strategy in ETF form, investing in currencies of commodity-intensive economies has long been a popular strategy on foreign exchange desks. Historically, currencies of commodity-producing currencies have exhibited increased sensitivity to global growth levels; during economic booms demand for raw material surges, sending both the prices of the commodities and value of related currencies higher. But these currencies have also held up relatively well during periods of slumping commodity prices, losing value in only about a third of “down” commodity quarters [also read What Every Investor Should Know About Commodity ETF Investing].
“We believe commodity producing countries are well-positioned to benefit from a global recovery and have developed CCX as an attractive multicurrency basket with exposure to this theme,” said WisdomTree President & COO Bruce Lavine. “In addition to presenting a distinct alternative to traditional currencies like the euro, yen and pound, exposure to commodity currencies has historically served to diversify a traditional portfolio.”
CCX also presents an intriguing option for hedging against unexpected upticks in inflation in the U.S., and could serve as a diversifying agent when added to traditional stock-and-bond portfolios. While CCX is classified within the Currency ETFdb Category it is perhaps more appropriate to think of the fund as an ultra-short term fixed income product, since it seeks to deliver returns including both money market rates and movements in the value of the constituent currencies relative to the dollar. Although money market rates in the U.S. are hovering near zero–and will likely remain there for the foreseeable future–some international options offer juicy short-term yields. Money market rates in Brazil are currently close to 9%, with South Africa (6.5%) and Australia (4.5%) also offering attractive yields.
In order to achieve exposure to these currency funds, CCX will invest in U.S. money market securities combined with currency forward contracts. In constructing the currency basket, each major export group–including energy, industrial metals, precious metals, livestock, and agriculture is always represented. No more than 50% of the selected currencies can be identified exclusively with one commodity group, and the basket will maintain allocations of at least 30% to both emerging and developed market currencies [also read Look Past BRIC ETFs To The CIVETS Bloc For Better Investment].
Old Strategy In A New Wrapper
CCX will be the first ETF to offer investors exposure to a strategy that foreign exchange desks have been implementing for a long time. In that sense, it is the latest ETF offering to democratize asset classes and investment strategies commonly used by large, sophisticated institutional investors. Other developments in that same vein include hedge fund replication ETFs offered by IndexIQ and long/short strategies from funds such as ALT and GRV.
CCX will be the ninth currency ETF offering from WisdomTree, and will join the Emerging Currency Fund (CEW) as the second product to offer exposure to a basket of currencies [also see Seven Currency ETFs Highly Dependent On Commodity Prices].
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Disclosure: No positions at time of writing.