How To Short The U.S. Dollar With ETFs

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September 29, 2013 10:38pm NYSE:UDN NYSE:UDNT

dollar etfThe mood in the market has changed abruptly following the conclusion of the FOMC meeting. Ben Bernanke surprised the market with a no-taper decision, keeping the current bond-buying

program intact. Investors were looking for a reduction of at least $10 billion in the Fed’s $85 billion per month in purchases.

No Tapering 

Though the delay in tapering sparked investors’ confidence across the riskier assets sending the broad equity and bond markets higher, it dampened the demand for safe haven currencies. As such, the U.S. dollar (USD), the shining currency this year, tumbled the most in seven months against a basket of major currencies in Asia (read: 3 ETF Winners from the ‘No Taper’ Shocker).

The FOMC said that the cut down in the bond buying would not happen until and unless the economy shows more evidence of solid growth. Instead, the Fed lowered the GDP growth outlook to 2–2.3% from 2.3–2.6% for this year, citing concerns relating to tight fiscal policy and higher mortgage rates.

Further, the Fed reiterated that the interest rates would stay near zero level and not be increase until the unemployment rate falls below 6.5% and inflation exceeds 2.5%.

Other Factors

The bearish trend in the greenback is expected to continue at least in the near term given the lower economic growth outlook and the improving global conditions.

China, as seen in nine of the past 10 quarters, is seemingly bottoming out. The European economy is on the verge of recovery thanks to upbeat data, less concerns on debt levels and a firmer currency. Further, the emerging markets are showing an impressive turnaround of late (read: Emerging Market ETFs Surge on Solid China Data).

Given the change in the market fundamentals, investors could think about shorting U.S. dollars to take advantage of the growing equity markets and the broad commodities strength.

How to Play?

While futures or short-currency approach are possibilities, there are a two lower-risk short USD ETF options which may make more sense to many investors. That is because these short USD ETFs prevent investors from losing more than their initial investment and are also cheaper than direct shorting currency or utilization of futures contracts.

So investors seeking to make a short play on USD could consider any of the following ETFs given the bearish outlook for the currency:

PowerShares DB US Dollar Bearish Fund (NYSEARCA:UDN)

This fund could be the prime beneficiary of the falling USD as it offers exposure against a basket of world currencies. These include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

This is done by tracking the Deutsche Bank Short US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.

In terms of holdings, UDN allocates nearly 58% in euros while 25% collectively in Japanese yen and British pounds. All of these currencies were on the rise over the past few weeks. The fund has so far managed an asset base of $64.2 million while sees moderate daily volume of 44,000 shares. It charges 75 bps in fees and expenses.

This ETF added 1.16% following the announcement of not withdrawing stimulus but is down 0.74% year-to-date. We believe that this is just the beginning of the trend, and that more gains could be ahead for this ETF in the future (read: Is the Dollar ETF About to Surge?).

PowerShares DB 3x Short US Dollar Index Futures ETN (NYSEARCA:UDNT)

This ETN seeks to provide three times (300%) inverse (opposite) exposure to the monthly performance of the Deutsche Bank Long U.S. Dollar Index Futures Index – Excess Return plus returns from U.S. T-bills net of fees and expenses.

The ETN is unpopular and could have wider bid ask spreads with AUM of only $1.7 million and average daily volume of just 6,000 shares. The product charges 95 bps in fees per year from investors. The note added nearly 3% buoyed by the negative sentiments for the greenback on a no-taper decision while it is down 15.64% in the year-to-date time frame.

Bottom Line

Investors should note that being extremely volatile, these products are suitable only for short-term traders. Additionally, rebalancing – when combined with leverage – may lead to returns that are not close to the expected long-term performance figures.

Still, for ETF investors who are bearish on the USD in the near term, either of the above products could make an interesting choice. Clearly, many are opting for riskier assets, so a near-term short could be intriguing for those with high risk tolerance, and a belief that the “trend is your friend” in this corner of the investing world.

This article is brought to you courtesy of Eric Dutram.

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