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Currency ETFs Getting More Interesting

By
Dennis Hudachek
February 19, 2013
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Will investors be open to using powerful new weapons to protect themselves from currency wars?

Pimco recently made a splash in the currency world after launching the first purely actively managed currency ETF on Feb. 12.

The Pimco Foreign Currency Strategy ETF (NYSEArca: FORX) provides exposure to a basket of currencies from developed as well as emerging markets that the managers think are poised to appreciate against the dollar over the long term.

I refer to FORX as the first “purely active” currency ETF because the active strategies behind the handful of existing currency basket funds from WisdomTree are quite different from what most might traditionally consider being active management.

In both the WisdomTree Emerging Markets Fund (NYSEArca: CEW) and WisdomTree Commodity Currency Fund (NYSEArca: CCX), underlying currencies are mostly fixed and rebalanced quarterly to keep them equally weighted. I like to think of this type of strategy as “semi-active.”

On that front, the WisdomTree funds certainly follow a more disciplined selection and weighting strategy—almost like an index fund—that many investors might actually prefer.

Comparatively, FORX has a go-anywhere, choose-any-currency-with-any-weighting strategy. This can also mean the portfolio of currencies can look very different depending on the day or specific macro environment. By the way, holdings of any one currency are capped at 20 percent.

I recently wrote about why active management can make sense in fixed-income and certain niche themes, like frontier markets. I also think active strategies are increasingly making sense in the currency space as well.

In response to the financial crisis of 2008, central bank interventions through quantitative easing programs are increasingly influencing the currency markets. As such, being selective in choosing the right currencies is becoming essential.

Switzerland and Japan are just two examples of how central bank actions can change the outlook for a currency overnight, though the yen’s plunge has been based mostly on strong political rhetoric thus far as opposed to bona fide policy moves. The European debt crisis and the European Central Bank’s actions are also heavily influencing the movements in the euro.

Noticeably absent from FORX is any euro exposure as of Feb. 13. Instead, FORX loads up on developed-country currencies like the Norwegian krone, the Swedish krone and the Canadian dollar.

 

ETF DAILY DATA

The consumer discretionary fund 'XLY' garnered a $1 billion-plus blast of creation on Tuesday, March 3. Still, a falling market offset net inflows and pulled total U.S.-listed ETF assets down to $2.092 trillion.

'VCR,' the consumer discretionary fund, paced Vanguard's issuer-leading inflows on Tuesday, March 3, as total U.S.-listed ETF assets ended the day at $2.092 trillion.

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