How Volatile Is Your Currency ETF?

by on April 3, 2013 | ETFs Mentioned:

As the world becomes more connected every day, investors continue to find new ways to trade around the world and gain exposure to countries they may never even get to visit. Exchange-traded funds offering exposure to Global Currencies have become a popular tool for those looking to make a direct play on a country, using the country’s currency value as a barometer for economic success. These funds offer investors the ability to easily tap into the heart of a country’s market; however, bypassing equities and commodities can often lead to volatile returns. Investors who wish to access the currency sector, for example, have a number of options available at their fingertips [Download Free Report: How To Buy The Right ETF Every Time].

2013 Currency Trends

Betting On Economies

Currency ETFs can be used to hedge inflation, portfolio risk and foreign political risk; using these funds in conjunction with a strong basket of equities and commodities can create outstanding results. However, currency ETFs alone can be one of the most volatile investable assets and should be used only after delving deep into the state and future outlook of the country. Growing in investment popularity are emerging economies like China, Brazil and South Africa, which offer higher potential returns, but also a riskier environment [see 10 Questions About ETFs You've Been Too Afraid To Ask].

The chart below contains eight of the almost 30 currency ETFs, and highlights their size, volatility and returns over the last three years:

  • PowerShares DB US Dollar Index Bullish Fund (UUP, A)
  • CurrencyShares Australian Dollar Trust (FXA, A-)
  • CurrencyShares Canadian Dollar Trust(FXC, A)
  • WisdomTree Emerging Currency Fund (CEW, A)
  • PowerShares DB G10 Currency Harvest Fund (DBV, A-)
  • CurrencyShares Swiss Franc Trust (FXF, B+)
  • CurrencyShares Euro Trust(FXE, A)
  • WisdomTree Chinese Yuan Fund (CYB, A+)

Investors should always look into the geopolitical structure in each country and its past actions, as these aspects could be a powerful indicator of the country’s future currency values.

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Disclosure: No positions at time of writing.