Currency ETF Report Card: 5 Years After the Market Bottom

by on March 25, 2014 | ETFs Mentioned:

The evolution of the exchange-traded product structure has opened up the doors to the foreign exchange market in ways that were previously impossible. Through the use of a single ticker, investors can now seamlessly, and in a cost-efficient manner, establish exposure to the most traded currencies around the globe.

As with any asset class, every currency is bolstered by a unique set of price drivers in addition to being influenced by overarching macroeconomic conditions, which is why investors must understand the inherent risks and nuances before jumping into a position. Our Ultimate Guide To Currency ETF Trading offers a great starting point for those looking to familiarize themselves with the products that offer exposure to this lucrative asset class.

In light of the U.S. bull market turning five years old this March, we’re taking a look back to the market bottom in 2009 to review how the major currencies have performed since the depths of the financial crisis [see also Currency ETFs vs. Their Stock Market Since Market Bottom].

Five Year Review: Currency ETF Returns

The comparison chart below is based on cumulative monthly returns using adjusted closing prices from the start of March 2009 through the beginning of March 2014:

Here are some key takeaways from the chart above:

  • The US dollar, as represented by PowerShares’ (UUP, A), has been the worst performer from this group since the market bottomed out; UUP’s returns have remained in negative territory for the last five years while the domestic equity market has enjoyed the unprecedented stimulus measures and ultra low-rates enacted by the Federal Reserve.
  • The euro, as represented by Guggenheim’s (FXE, A), has oscillated between minor gains and losses over the years as never-ending debt drama in the region has kept a lid on confidence while inspiring somewhat volatile swings for the currency.
  • The UK pound, as represented by Guggenheim’s (FXB, A-), has been the second best performing developed market currency since the bottom and it has also arguably been the most stable one; notice how FXB’s returns have remained consistently positive since the market bottom.
  • The Australian dollar, as represented by Guggenheim’s (FXA, A-), has been the best performing developed market currency since the bottom; however, FXA has been declining for the past year as the nation’s central bank has been trying to spur economic growth through a series of interest rate cuts.
  • The Japanese yen, as represented by Guggenheim’s (FXY, C+), has endured a volatile journey, starting with a strong uptrend right from the bottom; the tides turned for FXY by the end of 2012, however, as the nation’s central bank enacted a series of fiscal stimulus, monetary easing, and structural reforms in an effort to spur economic growth.
  • The Brazilian real, as represented by Wisdom Tree’s (BZF, A-), has been the second best performing currency from this group and was even the leader from the bottom until the Aussie dollar took over in September of 2011.
  • The Indian rupee, as represented by Wisdom Tree’s (ICN, A), has turned in a mixed performance from the bottom; ICN managed to rally initially, only to top out by late 2011 and dip into shallow negative territory by the second half of 2013.

The Bottom Line

Even if you’re not trading the currency ETFs themselves, it’s important to take note of their underlying trends, seeing as how fluctuation in the foreign exchange market can have a meaningful impact on equity funds tracking overseas markets. Investors who are aware of and understand a nation’s prevailing monetary policy effectively position themselves to make more informed decisions when it comes to establishing exposure to foreign markets.

Follow me on Twitter @SBojinov.

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Disclosure: No positions at time of writing.