Sliding Euro Presents Golden Opportunity

March 16, 2015 With negative yields in Europe, are you essentially getting paid to currency-hedge your equity exposure?


Mustin: There’s what’s referred to as a “positive carry” from being short negative-yielding currencies and long the dollar, which yields not very much, but there’s a positive yield on Treasurys.


When you factor in the management fees of ETFs and the cost of putting on those exposures, such as nondeliverable forwards, the positive carry does add some value—some basis points—offering a little yield.


However, it’s typically a side effect. It’s not really what investors are trying to target with these funds. There are more effective carry trades than the one you get from an equity exposure. What are other ways to play the sliding euro?


Mustin: One fund that is underloved is the AdvisorShares Gartman Gold/Euro ETF (GEUR | D-28). The same way an investor might prefer to diversify international equity exposure between dollar denominated and euro denominated, the same might be true—if not more true—of gold exposure.


Gold is an inflation hedge, seen as a safe haven. Combine that with the fact that the ECB is engaging in QE, which is intended to stoke inflation, investors might turn to a gold ETF to mitigate some of these inflationary effects. However, if you are holding gold in terms of U.S. dollar, the dollar has also appreciated considerably, so your gold holdings, on paper, have not done as well.


If you look in terms of a different currency, such as GEUR offers, you get the double-edged sword of a weak euro and the inflation hedge of gold. The SPDR Gold Trust (GLD | A-100) is down about 2.5 percent year-to-date, but GEUR is up 11 percent. It’s a considerable spread, and the same way investors might want to diversify a traditional equity exposure, they might say that as far as their precious metals exposure such as gold.


GEUR is still relatively small, but it has grown 5x in size this year. It’s at about $15 million in assets now. It is starting to generate some interest as investors see the opportunities in the euro trend beyond hedged equities. 


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