Currency ETFs Getting More Interesting

February 19, 2013


Even more obvious is the fund’s heavy exposure to emerging market currencies like the Russian ruble and Mexican peso—a more than 9 percent weighting in each. Other developing-country currencies rounding out the top 10 holdings are the Brazilian real, the Chinese renminbi and the South African rand.

FORX’s strategy looks very different from the strategy implemented by Axel Merk in his actively managed Merk Hard Currency Fund (MERKX), which currently has $584 million in assets under management.

I mention MERKX here because Merk filed for an ETF version of his flagship fund in March 2012, which is slated to trade under the ticker “MERK.”

As of Dec. 31, 2012, MERKX held a 31.5 percent exposure to the euro, as well as significant exposure to the Australian and Singapore dollars. Also worth noting is that MERKX targets only developed-market currencies and even holds a position in gold, which Merk considers the ultimate hard currency.

Moreover, these funds can also take negative exposures to certain foreign currencies if the situation warrants itself or the manager sees an opportunity, thereby benefiting when the dollar rises against the currency in question.

In a world where currency wars are beginning to brew as central banks engage in unilateral actions, it’s increasingly possible that the U.S. dollar can at times be more of a “safe haven” relative to a specific currency or currencies.

The recent plunge in the Japanese yen due to the political developments in Japan is a prime example.

MERKX actually held an 8.5 percent negative exposure to the yen at year-end 2012, while FORX is also capable of taking negative exposure to a foreign currency.

While it might be easy to pit FORX against Merk’s upcoming ETF once it launches, they may produce some very different returns, based on their current holdings. Their differing strategies might actually mean the two can be complements to each other, rather than competitors.

Either way, the currency space looks to be evolving.

Time will tell if investors on a larger scale will come to accept and embrace currencies as a viable long-term investment asset class, as opposed to using them simply for tactical or hedging purposes.

Still, it’s hard to overlook the current turmoil in the currency space and wonder if the time isn’t ripe for these types of funds to really shine.

At the time this article was written, the author had no positions in the securities mentioned. Contact Dennis Hudachek at [email protected].


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