Among the various asset classes accessible via exchange-traded funds (ETFs), currencies often go overlooked by many investors. That is likely an extension of the well-documented home country bias many investors have.
In the U.S., investors are apt to embrace dollar-denominated investments, be it bonds, commodities or other assets. Even when it comes to investing in ex-US markets, American investors often overlook currency risk in favor of vehicles denominated in dollars.
This year, the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP), which tracks the greenback against a basket of major foreign currencies, is one of the best-performing currency ETFs. UUP gauges the dollar’s performance against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc and is up 6.33% year-to-date.
However, as is the case with other assets, dollar bull markets do not last forever and with some market observers forecasting dollar declines in 2019, some other currency ETFs may be worth considering. Here are some currency ETFs to mull over in the New Year.
Invesco DB US Dollar Index Bearish Fund (UDN)
Expense Ratio: 0.80% per year, or $80 per $10,000 invested
Put simply, the Invesco DB US Dollar Index Bearish Fund (NYSEARCA:UDN) is the bearish answer to the aforementioned UUP. UDN is arguably the most well-known bearish currency ETF and it is not leveraged, so it is less volatile and an easier hold for investors looking to be short the greenback for several days or weeks.
While the greenback has been a star among currencies this year, UDN is setting up to be a winner among currency ETFs in 2019.
“In the latest Reuters poll of more than 60 currency analysts, taken Nov. 28-Dec. 5, the dollar was forecast to be weaker against major currencies in a year,” reports Reuters. “The greenback may also struggle to move much higher, given currency speculators’ bets in favor of the dollar are the highest since December 2016, according to Commodity Futures Trading Commission data.”
WisdomTree Emerging Currency Strategy Fund (CEW)
Expense Ratio: 0.55%
Emerging markets stocks are not the only asset class in the developing world getting hammered this year. A primary reason why bonds and equities in emerging markets are flailing this year is the strong U.S. dollar, a scenario that has made the WisdomTree Emerging Currency Strategy Fund (NYSEARCA:CEW) a dog among currency ETFs.
The Federal Reserve’s 2018 rate tightening regime has punished nearly every currency ETF aside from the dollar bullish UUP, but if the Fed slows its pace of rate hikes next year or eliminates it altogether, currency ETFs such as CEW could benefit. Some market observers are already forecasting a 2019 rebound for emerging markets currencies.
“Goldman Sachs Asset Management expects to see improving economic conditions in emerging markets over the coming months, thus providing a springboard for the value of regional stocks and currencies,” reports CNBC.
Vanguard Total International Bond ETF (BNDX)
Expense Ratio: 0.11%
Vanguard is not a major player in currency ETFs, but one of its offerings on that front is worth considering for income investors. The Vanguard Total International Bond ETF (NASDAQ:BNDX) hedges currency risk by tracking the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged).
The hedging strategy employed by BNDX is important because the more than 5,400 bonds held by this currency ETF are not denominated in dollars. This currency ETF’s hedging strategy is proving less bad in 2018 as BNDX is down just 0.42%. Plus, this Vanguard fund is cheaper than 88% of rival funds, according to issuer data.
BNDX’s holdings have an average duration of 7.8 years and credit risk is minimal with this fund as approximately 83% of its holdings are rated between A and AAA. This currency ETF yields 2.27%.
Xtrackers MSCI Europe Hedged Equity ETF (DBEU)
Expense Ratio: 0.45%
The Xtrackers MSCI Europe Hedged Equity ETF (NYSEARCA:DBEU) is a currency ETF that needs two things to happen to deliver for investors. As an equity-based currency hedged ETF, DBEU is likely to rise if the dollar remains strong against major European currencies while stocks in the region rise.
That is not a far-flung scenario and it has happened before. Many of the largest companies residing in this currency ETF generate significant portions of their sales in the U.S. So if the dollar is strong, that benefits the companies as they convert dollars generated by U.S. sales back into euros, francs and pounds.
DBEU includes exposure to stocks from Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Consumer staples and healthcare stocks, two export-driven groups, combine for over a quarter of DBEU’s weight.
SPDR Long Dollar Gold Trust (GLDW)
Expense Ratio: 0.50%
Gold, like other commodities, is denominated in dollars. Typically, that is bad news when the dollar rises, but the SPDR Long Dollar Gold Trust (NYSEARCA:GLDW) is a currency ETF meets gold ETF that can help investors stay engaged with bullion, even when the dollar is moving higher.
GLDW, which is nearly two years old, follows the Solactive GLD Long USD Gold Index. That index is “designed to represent the daily performance of a long position in physical gold and a short position in a basket (“the FX Basket”) comprised of each of the Reference Currencies (i.e., a long USD exposure versus the FX Basket),” according to State Street.
Currencies measured against the dollar within GLDW are the euro, Japanese yen, British pound sterling, Canadian dollar, Swedish krona and Swiss franc.
Notably, this currency ETF earned its paycheck in 2018. While basic gold ETFs were down almost 3%, GLDW was up 3.61%.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.