Blog

The Irrelevance Of Currency ETFs

December 06, 2012
Share:

Two WisdomTree currency ETFs closed up shop this week, highlighting the lack of interest in the asset class.

The expansion of the ETF market has been well documented here and elsewhere, but off-the-beaten track asset classes have yet to really catch on.

Currency ETFs, for example, have fewer assets now, at $3.8 billion, than the $4.5 billion they had at the same time last year.

Just 24 currency ETFs are now on the market, with average assets of $160 million. And of those 24, not one has more than $1 billion in assets, and less than 10 of them have as much as $100 million.

In fact, once you add up the top 10 currency ETFs, less than $200 million is spread across the remaining 14 funds. Only one fund, the CurrencyShares Euro Trust (NYSEArca: FXE) gets more than $100 million in daily volume, and less than $200 million in volume comes into all currency ETFs combined on a daily basis.

In other words, realistically there are fewer than 15 viable currency ETFs on the market right now.

It may be that currencies fit poorly in an ETF wrapper. After all, currency markets are the most liquid on earth and are open 24 hours a day. For an ETF to be a reasonable replacement, it must trade with tight spreads and attract hundreds of millions in daily dollar volume.

Unfortunately, the number of ETFs that fit that bill right now is fewer than five.

What’s more, ETFs focused on foreign exchange markets are necessarily designed for the retail audience. The problem is, most individual investors don’t have any interest in speculating on currencies, and the availability of currency ETFs won’t change that.

It’s not a new problem, either. After all, investors have been able to open forex accounts for decades, and the retail adoption of those strategies has been spotty at best.

I mention that basic challenge without even considering the complexity of the actual mechanics of currency ETFs.

Some, like WisdomTree’s products, take both long and short exposure in currency forwards, while others buy local-currency-denominated sovereign bonds. In both cases, the exposure you get may differ greatly from the quoted exchange rate you will see on your favorite financial website.

As such, the products are most likely to be used by institutional investors or more sophisticated advisors managing client funds.

And the truth is that most of those institutions have access to cheaper forex exposure either via the bank where they custody funds or through relationships they have in the industry. Compared to the five-, 10- or 75-basis point bid/ask spreads on many currency ETFs, going directly to the forex market instead is a no brainer.

So why then are any currency ETFs attracting assets?

 

ETF.COM CHANNELS

Trying to figure out alternatives ETFs? Use our alternatives ETFs channel, library and ETF screener!

Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!

ETF DAILY DATA

Investors yanked more than $2 billion from U.S. equity funds on July 31. Among the day's biggest redemptions were 'SPY', 'QQQ' and 'IWM.'

State Street, iShares and Invesco PowerShares each faced sizable outflows on July 31, as total U.S. listed ETF assets ended the day at $2.142 trillion.

ETF.COM ANALYST BLOGS

By Matt Hougan

Eaton Vance offering radical pricing with its exchange-traded managed funds.

By Dave Nadig

It’s impressive how the Global X FTSE Greece 20 ETF and its issuer have weathered the country's financial storm.

By Matt Hougan

The median ETF tracks its index perfectly excluding expenses. But different firms and funds perform quite differently.

By Paul Britt

Toss and turn about whether to hedge currency risk, but don’t lose sleep over the derivatives themselves.

ETF INDUSTRY PERSPECTIVE

By Invesco PowerShares

A more in-depth look at the smart-beta survey's results.

By Invesco PowerShares

Smart beta appears to be poised for further growth.