ETF Spotlight: February 2011
Each month, we highlight an ETF flying under the radar of most investors that offers exposure to a unique asset class or investment strategies. This month, we take a closer look at an actively managed exchange-traded fund from WisdomTree that offers a unique way for investors to achieve commodity exposure: the Dreyfus Commodity Currency Fund (CCX).
The new year has been quite a roller-coaster ride already, with European debt fears still looming in the background, domestic equity markets have somehow managed to continue to inch higher. 2011 has also brought some volatility to the currency markets as well, aside from the dollar which has been flat, the yen and the Australian dollar have been loosing ground while the euro has managed to rally early into the year despite weakening long-term fundamentals.
The commodity asset class has been loosing its luster recently, considering the stellar run-ups of gold, oil, and silver, it’s not too much of surprise that these products have recently come under pressure in the futures market. Global debt fears and stagnant economic growth, especially with regards to domestic job creation, are factors which have all played a role in pressuring emerging markets lower as well.
Going forward, several investment themes stand out as intriguing strategies given the uncertainty that is still plaguing financial markets across the world. Inflation-fighting is a key tactic going forward given the challenges that central banks around the world will soon combat. Selective commodity exposure is also an essential strategy because it offers lucrative returns with manageable risks. Additionally, ongoing talks of expected increases in energy and food prices, coupled with increasing spending on infrastructure in emerging markets are all favorable factors for commodity prices. However, the above two strategies in tandem are not easy to implement by any means, especially by the average investor.
CCX come into the spotlight because of its simple yet attractive investment strategy. The fund is actively managed and it 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. The fund’s strategy is nothing new, however, its recent availability in the ETF world is truly a step forward in further democratizing asset classes. Each of the fund’s component currencies is linked to an economy in which commodities account for a significant portion of exports. The investment prospectus is simple, invest in currencies which are likely to appreciate as a result of growing demand for that country’s commodities. Below is a table profiling the various currencies in which CCX is currently invested in:
|Australia||Australian Dollar||coal, iron ore, gold|
|Brazil||Real||coffee, soybeans, wheat|
|Canada||Canadian Dollar||crude oil, natural gas, metals|
|New Zealand||New Zealand Dollar||livestock|
|Russia||Ruble||natural gas, crude oil, metals|
|South Africa||Rand||gold, platinum|
It should also be noted that the fund will only invest in “floating” currencies, whose value is largely determined by supply/demand and market rates. “Fixed” currencies will be excluded from possible investments because the currencies of large commodity-producers such as China and Saudi Arabia are too closely linked with the U.S. dollar.
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 portfolio’s currency basket, each major export group–including energy, industrial metals, precious metals, livestock, and agriculture is always represented. Also, no more than 50% of the selected currencies can be identified exclusively with one commodity group. Additionally, the fund will maintain allocations of at least 30% to both emerging and developed market currencies.
Historically, currencies of commodity-producing currencies have exhibited increased sensitivity to global growth levels; during economic expansion demand for raw material tends to surge,which allows for the commodity and the respective country’s currency to appreciate. What’s really compelling about this strategy is the fact that such commodity-currencies have held up relatively well during periods of slumping commodity prices, losing value in only about a third of “down” commodity quarters.
Investing in currencies, commodities, and emerging markets especially, entails significant risks. CCX offers investors exposure to all three of these areas with a reasonable expense ratio of 0.55%. WisdomTree’s Dreyfus Commodity Currency Fund is a remarkable investment vehicle, offering commodity-exposure with the added protection of serving as a hedge against inflation in developed markets.