4 Currency ETPs to Cash In On

by Susan J. Aluise | April 19, 2012 10:00 am

“Paper money eventually returns to its intrinsic value — zero.”
— Voltaire

It’s easy to see why the 18th century French writer and philosopher would not have lasted long as a Forex broker.

Sophisticated, high-asset investors have long experienced the adrenaline rush of buying and selling one country’s currency against that of another in perhaps the purest display of supply and demand.

However, because currency trading can be an arcane and complex endeavor, many investors have passed on the opportunity. More recently, investors have had another way to profit from shifts in other currencies: currency exchange-traded products (ETPs).

Why do investors want to dabble in foreign currencies? For some, it’s the thrill of being modern-day adventurers, navigating the tangled web of hundreds of currencies that are in constant flux. The goal: to profit from movements in a market that sees more than $5 trillion in average daily transaction volume.

The romance aside, most investors are seeking effective alternatives for diversifying their portfolios and insulating themselves when the stock or bond markets move against them. This can be a winning play because the same economic factors that can hammer major stock indices just might cause an uptick in certain currencies. Currency exchange-traded funds (ETFs) and exchange-traded notes (ETNs) are an easy way for investors to gain exposure to foreign currencies.

There is a difference between an ETF and an ETN, however. ETFs tend to be actual currency derivatives such as forwards or options; ETNs are issued as senior debt notes and are more like buying a bond. The credit risk typically is higher with an ETN than with an ETF.

Here are two currency ETFs and two currency ETNs to cash in on:

ProShares UltraShort Yen (NYSE:YCS[1]): If you think that the Japanese yen is in a downturn, this ETF is an aggressive play on that weakness. YCS is a double-leveraged, inverse ETF that aims to deliver double the opposite performance of the yen, as priced in U.S. dollars. To do this, the ETF invests in one or more financial instruments, such as swaps, futures, forward or options contracts. But investors should be warned that leveraged ETFs that magnify returns have strong potential downside risk, too. YCS has a market cap of nearly $260 million and trades around $45; its 0.95% expense ratio is relatively high. YCS has declined 16% during the past three years but is up 9.4% year-to-date.

iPath GBP/USD Exchange Rate ETN (NYSE:GBB[2]): If you’re betting on the spread between the British pound Sterling and the U.S. Dollar, GBB is a possible candidate. This ETN tracks the price and yield performance of the British pound/U.S. dollar exchange rate, after expenses. GBB has just $2.6 million in assets, currently trades under $43 and has a lower-than-average expense ratio of 0.4%. It has a three-year return of 2.3% and a year-to-date return of 3.3%.

WisdomTree Dreyfus Emerging Currency (NYSE:CEW[3]): If you’re interested in emerging markets but want exposure to more than one currency, CEW might be up your alley. This ETF seeks to match returns both of money market rates in emerging-market countries and changes to the value of those currencies against the U.S. dollar. CEW has $323 million in assets, trades around $21 and charges 0.55% in expenses. Emerging Currency, launched in May 2009, has lost 5.6% in the past 52 weeks, but has gained 5.6% since Jan. 1, 2012.

Market Vectors Indian Rupee/USD ETN (NYSE:INR[4]): If an exchange rate play between the rupee and the U.S. dollar interests you, Market Vector’s ETN provides that exposure. It seeks to replicate the S&P Indian Rupee Total Return Index, which tracks the value of the rupee relative to the dollar, focusing on non-deliverable, three-month currency forward contracts. INR also has a small amount of assets, just $2.7 million, and trades around $37, with an expense ratio of 0.55%. INR has returned 2.5% in the past three years, including a 3.9% YTD return.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. YCS: http://studio-5.financialcontent.com/investplace/quote?Symbol=YCS
  2. GBB: http://studio-5.financialcontent.com/investplace/quote?Symbol=GBB
  3. CEW: http://studio-5.financialcontent.com/investplace/quote?Symbol=CEW
  4. INR: http://studio-5.financialcontent.com/investplace/quote?Symbol=INR

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