Merk’s Hard Currency ETF

April 04, 2012

 

So, if HRD were to launch today, it would predominantly look like a developed-market, commodity-currency fund—with a touch of gold and the euro, at 9 percent and 9.7 percent, respectively.

It’s important to remember that HRD is actively managed, so Merk can alter the portfolio on a whim, depending on changes in macroeconomic conditions or central bank actions around the world.

Just to show how quickly these changes can be implemented, in the first three weeks of March, Merk took his holdings of the Japanese yen from 4.2 percent to zero.

That decision was based on the Bank of Japan’s announcement of a new inflation target, which pummeled the yen in the past month and a half.

Currency Funds As An Investment Tool

In general, the idea of using currencies as an investment tool hasn’t quite taken off in the investment world. As an example, while MERKX is one of the largest and most popular currency mutual funds, it’s still only a $550 million fund.

So, I’m not expecting any immediate investor mania for HRD, the likes of what we saw with the high-profile launch of Bill Gross’ Pimco Total Return ETF (NYSEArca: BOND) last month.

But with sovereign debt issues in much of the developed world causing coordinated central-bank stimulus on an unprecedented level all around the world, we’re clearly in uncharted waters.

If Merk and Gross are correct in their predictions that more “quantitative easing” programs are on the way from the Federal Reserve, I can see a fund like HRD gaining followers.

For those skeptical of currency funds as an investment play, just take a look at the returns of MERKX versus the SPDR S&P 500 ETF (NYSEArca: SPY).

Believe it or not, MERKX has actually outperformed the broad equity markets since its inception in May 2005.

 

Total Returns since 5/10/05: DXY vs MERKX vs SPY

Source: Bloomberg

 

MERKX also trounced the returns of the inverse of the U.S. Dollar Index by more than 37 percent.

Of course, you can make the case that the U.S. Dollar Index is outdated and that the fund’s exposure to gold played a role in its outperformance.

Still, that’s pretty impressive fund management.

The launch of HRD should provide a quick and cheaper way to get a slice of a solid fund managed by one of the top currency experts in the world. To me, it’s the launch to watch in the coming months.

 

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