The Irrelevance Of Currency ETFs

December 06, 2012


One reason may be the relative attractiveness of basket strategies.

The top currency ETF, the PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP), offers exposure to the currencies that constitute the U.S. Dollar Index.

Clearly, using this type of ETF in place of managing the weightings to the yen, euro or loonie via the forex market may make sense for some large investors.

Another reason may be access. Markets like China and India, where currencies are restricted, are harder for even institutions to access. As such, the ETF wrapper may be investors’ only option for speculating on these currencies or for putting on a hedge.

Finally, there may also be investors looking to improve the yield of the cash position in their portfolio. With negative real yields here in the U.S., currencies like the Aussie dollar and Canadian loonie are increasingly attractive as parking lots for cash.

That helps explain why the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) and the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC)—two of the highest-yielding currency funds on the market—have a combined $1 billion in assets between them.

It remains to be seen if the currency ETF market will continue to consolidate to the point where a handful of strategies remain and issuers abandon the rest.

After all, most investors have no desire to strip out their currency exposure, and institutions can probably do better in most currencies by transacting in the forex market directly.

If the recent closures are any indication, the currency ETF market is not the place to look for growth moving forward.



At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected].

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