This past year has been marked by uncertainty and instability; what started off as a strong 2011, quickly turned into a wild ride for investors. As equities have been tossed back in forth in recent weeks, investors have their eyes fixed on major indexes and other indicators to judge the overall health of our economy. Needless to say, with all of the turmoil, a number of asset classes have flown relatively under the radar, including currencies.
The greenback is always an area of concern, since virtually every major commodity is quoted in dollars and fluctuations in the currency can have an impact on geopolitical events as well. However, these concerns have slipped by the wayside in recent months as investors have instead focused in on rocky stock markets and the possibility of more accommodating policies by the Federal Reserve. Nonetheless, for 2011, the dollar has been nothing short of disappointing, as the former safe haven slowly crumbled, with investors fleeing into more comfortable investments like gold and silver. In fact, the DB USD Index Bullish Fund (UUP), which tracks the performance of the U.S. dollar against a basket of developed market currencies, has lost around 7.8% thus far in 2011. What’s more, the fund is down over 13% in the trailing 12 months and down 12.5% in the trailing three years, proving that the dollar has fallen on some tough times as of late. Incidentally, this has been the worst-performing currency ETF on the year [see also ETF Insider: Be Wary Of Bargain Shopping].
As investors look for new currencies for their portfolios, the ETF world offers numerous options that some investors may not have even been aware of. There are now 30 ETFs in our Currency ETFdb Category, with some funds offering exposure to currencies like the South African Rand, Mexican Peso, as well as a variety of basket currency products. These products allow investors to make a play on their favorite currencies without having to own and operate a complex forex account, where most trades are measured in hours and minutes rather than weeks and months. Instead, these ETFs allow for both active traders and “buy-and-hold” investors to gain access to this important asset class with far lower levels of risk.
For those sorting through the various currency options, we outline the three best-performing currency ETFs of 2011:
1. CurrencyShares Swiss Franc Trust (FXF)
This product is designed to track the Swiss franc, a currency of celebrity status for 2011. The fund itself has gained 14% on the year, as the franc has come under the microscope for investors around the world. The Swiss currency has been appreciating for some time now, as traders are beginning to think of it as the newest safe haven currency. As the inflows poured in, this ETF shot up to over $1 billion in assets with an average of 591,000 shares traded every day [see also ETFdb Category Kings: Best Performers From First Half Of 2011].
While the franc began to rapidly appreciate, the Swiss National Bank was nearly forced to intervene. The currency had risen to the point where it was damaging the country’s crucial export sector, forcing the central bank to threaten to peg the currency to the euro. The franc has somewhat calmed over the last month, but if it were to spike again, the Swiss government may have no choice but to take action.
2. Dreyfus New Zealand Dollar Fund (BNZ)
This fund, offered by WisdomTree, is designed to track the New Zealand dollar against the American currency, and charges an expense ratio of 0.45%. BNZ has jumped over 10% on the year thanks to a number of factors. First, it should be noted that most foreign currencies are seeing a small boost from investors fleeing the sinking U.S. dollar. With that being said, New Zealand’s dollar has seen gains from its strong economy as well as the greenback’s weakness. With Fed Chair Ben Bernanke delaying any kind of intervention until at least September, many investors are pricing in the news of some sort of asset-purchasing program from the U.S., leading them to hold in other currencies, like the New Zealand dollar, as they wait to see how the greenback plays out.
3. EUR/USD Exchange Rate ETN (ERO)
This fund’s performance may come as a bit of a surprise to some investors, as the euro-zone has been under immense pressure for the majority of the year. Fears of a Greek default sparked worry over the stability of the euro, which many felt was on the verge of collapsing. While this currency has been somewhat range-bound for the last few months, the beginning of the year saw the euro make strong gains, which is likely what has lead to this ETF performing so well in 2011, as it has returned just over 9.1% since the start of January. Some may be quick to write off this performance as the ETF is pegged to the flailing dollar, but consider that the Dreyfus Euro Fund (EU) is up 8.9% over the same period, proving that the euro is still benefiting from its quick start out of the gate for 2011 [see also Which Euro ETF Is Right For You?].
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Disclosure: No positions at time of writing.