WisdomTree’s New Long Dollar ETF Shines

The firm's long-dollar ETF ‘USDU’ is getting the attention it deserves.

Long-dollar ETFs are all the rage in the currency space this year. The three largest currency ETFs by assets are all long-dollar funds.

But one in particular jumped out at me a few weeks ago based on volume and flows.

That’s the WisdomTree Bloomberg US Dollar Bullish Fund (USDU | 67), which shorts a basket of 10 developed and emerging markets currencies against the dollar. It’s surging both in terms of assets and performance.

Asset Flows

On Oct. 28, the day before the Federal Reserve announced the end of asset purchases under its quantitative easing (QE) program, USDU posted a volume of 3,198,000 shares, or $82.8 million. To put things into perspective, USDU’s median daily volume is just 9,300 shares, or $243,000.

Source: Bloomberg

The volume on that single day represented 34,387 percent of its median daily volume! Of course, its average volume is now $2.42 million, which is being heavily skewed by that single day.

Source: ETF.com

At ETF.com Analytics, we place a heavier emphasis on median, rather than average volume. The median volume represents a more accurate picture of what the ETF “tends” to trade on most days, rather than an average that can be skewed by a handful of unusual trading days.

So the next question becomes whether that a massive buy or sell order.

As you can imagine, it ended up being a massive buy, as the ETF shows an inflow of $83.2 million on Oct. 29, 2014 (remember, flows lag by one day).

Source: ETF.com

If you look at flows for all of 2014, USDU had net inflows of $118.7 million, which amounts to year-to-date fund growth of 364 percent, based on its $32.6 million in assets under management on Jan. 1, 2014.

USDU’s main competitor, the $943 million PowerShares DB US Dollar Bullish Portfolio (UUP | D-73), has seen inflows of $207.8 million, amounting to fund growth of 31 percent year-to-date.

Clearly, these inflows reflect the strong U.S. dollar sentiment this year. It’s worth pointing out, however, that currency funds often see bouts of large inflows and outflows from speculative bets made on currencies.

For example, check out Dave’s blog about the massive $503 million inflow the WisdomTree Brazilian Real ETF (BZF | B-91) got on Oct. 11, 2013. Only 3 ½ months later, on Jan. 28, 2014, most of those assets, $453 million, flowed out of the fund on a single day. BZF is now a $28 million ETF.

Source: ETF.com

Clearly this doesn’t mean USDU is destined for the same fate. Since USDU’s a basket fund, these assets could be stickier.

The point I’m making here is that currency ETFs differ in their uses from equity funds, and speculative movements based on central bank interventions and hedging purposes can at times lead to sudden changes in flows.

2014 US Dollar Performance

Year-to-date, the US Dollar Index is up 9.6 percent. Backed by the surging dollar, USDU is up 6.1 percent year-to-date—very impressive for such a diversified currency-basket ETF.

Still, USDU’s returns aren’t as impressive as UUP, which tracks the US Dollar Index and is up 8.3 percent this year. Part of USDU’s lag comes from shorting higher-yielding currencies.

Remember that a long-dollar ETF is inherently shorting counter-currencies. USDU does this through forward contracts, which carry negative embedded yields for higher-yielding currencies like the Mexican peso, Australian dollar, Brazilian real and the Korean won.

Of course, the same holds true of UUP, but since its basket only consists of six developed-market currencies that are yielding practically nothing, this isn’t an issue for UUP at the moment.

Still, I’m a firm believer that USDU represents a basket of currencies more reflective of today’s global trade than the US Dollar Index, which was created back in the 1970s.

With UUP, you’re basically making a massive bet against a single currency, the euro, which makes up nearly 60 percent of the index’s weighting. I blogged about this issue in January, just weeks after USDU launched.

Here’s a recent table of their differences in currency exposure:

Sources: PowerShares, WisdomTree

US Dollar Outlook For 2015

It looks like sentiment for the dollar remains very strong heading into 2015.

The Bank of Japan just increased its already-massive stimulus program, while the ECB is looking into launching additional stimulus measures to battle deflationary forces in the eurozone. This is all happening precisely when the Federal Reserve just ended its QE program.

I expect continued momentum in USDU as more investors become aware of its “21^st century” basket of currencies. That said, I’d like to see a short-dollar version of USDU launch for investors not fully convinced that the decade-long dollar bear market is over for good.

The dynamics around currency investing is very different from equities. I think there are missing currency strategies that still don’t exist in an ETF wrapper. I’ll go into more details about this in an upcoming blog.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.