The lure of profiting in foreign exchange has been ringing for some time now. The financial media is filled with firms advertising the gains that can be found in Forex. But with so many competitors in this area, picking a strategy can be far more difficult than watching how currency values change — and weeding out the bad ones can be even more difficult. Here are three foreign exchange ETFs/ETNs to avoid:
The PowerShares DB G10 Harvest ETF (NYSE:DBV) takes advantage of the changes in comparative currency values by using futures contracts. Management of DBV will take either long or short positions in currencies issued by some of the G10 countries. Holdings include the Australian dollar, the Swiss franc, the Japanese yen, the Norwegian kroner, the New Zealand dollar and the U.S. dollar. The inception date of this fund is Sept. 30, 2006, and the past returns as of Sept. 15, 2011 are:
- 1 month: -0.82%
- 3 months: -1.98%
- 1 year: 10.97%
- 3 years: -1.73%
With the exception of the one-year return, this looks like a flat-line pattern only worthwhile as idle conversation between investors about foreign exchange investing.
The Wisdom Tree Dreyfus Emerging Country ETF (NYSE:CEW) sounds like a program that should deliver high returns and a strong dose of volatility. CEW places funds in money markets and short-term government securities of various countries. As of Sept. 14, 2011, the top 10 issuing countries and weightings are:
- China: 8.97%
- Chile: 8.59%
- Turkey: 8.57%
- South Korea: 8.53%
- Malaysia: 8.49%
- Indonesia: 8.42%
- India: 8.1%
- Brazil: 8.15%
- South Africa: 8.12%
- Russia: 8.1%
The fund was created May of 2009. In its short history, it appears the approximately 8% allocation to each country started with a bang — then began to wither. The returns for CEW are:
- 1 month: -2.1%
- 3 months: -1.21%
- 1 year: 8.75%
- Since inception: 1.46%
Another competitor in this market that seems to follow the same patterns is the iPath Optimized Currenct Carry ETN (NYSE:ICI). This is an exchange-traded note sponsored by Barclays that promises to repay note holder principal and interest based on currency speculation on Jan. 28, 2038.
ICI attempts to generate returns by taking long or short positions on one-month forward contracts on the following currencies: the Australian dollar, the kroner, the U.S. dollar, the euro, the British pound, the yen, the Swiss franc, the New Zealand dollar, the Swedish krona and the Canadian dollar. This system also has produced lackluster returns.
- 1 month: -0.97%
- 3 months: -1.63%
- 1 years: -0.1%
- 3 years: -2.5%
- Since inception: -3.53%
Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at mercapitalgroup@aol.com. He has no direct or indirect holdings in any of the aforementioned ETFs.
