Country vs. Basket: Which Currency ETF Strategy Is Right For You?

by on February 25, 2013 | ETFs Mentioned:

ETFs continue to open up the doors to international markets that were previously too difficult, or costly, to access for mainstream investors. Those looking for the most direct exposure to a foreign economy often choose to invest in the local currency rather than equity or bond funds, especially when looking for a risky but potentially high return in a slow global market. Not surprisingly, currency markets thus far in 2013 have been highly active as countries around the globe continue to pull together stimulus measures to prop up their lackluster economies.

There are a number of ways to play this often misunderstood asset class, but keeping one eye on this corner of the market and reading the signs correctly can give great insight to anyone looking to invest internationally [see 101 ETF Lessons Every Financial Advisor Should Learn].

Ways to Invest OverseasCurrency Futures Are One Option for the New ALT

With any asset class, there are many different ways to gain exposure to currency changes, but maybe the most popular forms are single currency and basket funds. ETFs that offer exposure to just one currency can bring in record returns or crash and burn, depending on the actions of that country’s central bank and government, so before investing in these it is highly advised that investors do their research. For the more risk-averse investor, a basket of currencies can help hedge the effects of one poorly performing economy.  These funds may not bring such high returns, but they promise more stability [also see ETFs For Top Currency Trends in 2013].

The table below highlights the difference in performances of three single currency ETFs (FXE, FXA, and FXC) and three basket funds (UUP, CEW, and DBV):

  • CurrencyShares Australian Dollar Trust (FXA, A-)
  • CurrencyShares Euro Dollar Trust (FXE, A)
  • CurrencyShares Canadian Dollar Trust (FXC, A)
  • DB USD Index Bullish (UUP, A)
  • Dreyfus Emerging Currency Fund (CEW, A)
  • DG G10 Currency Hedge (DBV, A-)

The CurrencyShares funds consistently have a higher 200-day volatility than the basket funds and there is a much greater difference in their returns, both high and low, over the last three years. Of course, there’s no universally right choice from the above ETFs; investors should take the time to investigate each fund individually before investing, especially when global economies are in a more fragile state.

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Disclosure: No positions at time of writing.