A Long-Dollar ETF For The 21st Century

January 06, 2014

WisdomTree’s long-dollar currency ETF is the right fund at the right time.

WisdomTree’s new long-dollar currency ETF is truly one for the ages, literally. I’ve long felt that we’ve needed an alternative to the decades-old US Dollar Index, which was created back in 1973.

So how does the WisdomTree Bloomberg US Dollar Bullish Fund (USDU) differ from its lone competitor, the $682 million PowerShares BD US Dollar Bullish Fund (UUP | B-39), which also happens to be the largest currency ETF?

For starters, there are major differences in the composition of the two funds. There are also differences in the structure of the ETFs.

More on that later, but first let’s start with the currency basket.

WisdomTree’s USDU closely follows the newly created Bloomberg Dollar Spot Index (BBDXY), which includes a trade- and liquidity-selected and -weighted basket of currencies that is rebalanced annually in December.

USDU currently shorts a basket of 10 currencies from major U.S. trading partners from developed as well as emerging markets, including the Brazilian real, Mexican peso, South Korean won and Chinese renminbi.

While USDU is technically an active fund, this has more to do with regulatory factors surrounding listing requirements for currency funds, rather than because the fund is an active strategy where the manager freely picks currencies based on macroeconomic analysis.

In fact, USDU attempts to track BBDXY as closely as possible using forward currency contracts. That said, USDU does attempt to beat the “Total Return” version of the index, which naturally underperforms the “Spot Index” due to negative carry costs associated with shorting high-yielding currencies (remember that the index is “short” the currency basket relative to the dollar).

In comparison, UUP’s underlying index, the US Dollar Index (USDX), was created and weighted according to global trade in the early 1970s. It dates back to the collapse of the Bretton Woods currency system when President Nixon took the dollar off the gold standard.

Since then, the composition of USDX has been fixed. It’s been “adjusted” once in 1999 with the introduction of the euro, when several European currencies were rolled into the single currency.

The euro now makes up close to 60 percent of the index’s weighting, making the index highly correlated to movements in the euro.

A quick peek at the currencies included in the two ETFs shows just how different they are in composition.

USDX Vs. BBDXY Composition

US Dollar Index Bloomberg Dollar
Spot Index
Euro 57.6% 31.4%
Japanese yen 13.6% 19.1%
Canadian dollar 9.1% 11.5%
Pound sterling 11.9% 9.6%
Mexican peso 0.0% 9.5%
Australian dollar 0.0% 6.2%
Swiss franc 3.6% 4.2%
South Korean won 0.0% 3.3%
Chinese yuan 0.0% 3.0%
Brazilian real 0.0% 2.2%
Swedish krona 4.2% 0.0%

Source: Bloomberg

 

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