Eric Dutram: The global economic uncertainties revolving around the European debt crisis and the general slowdown in most economies have resulted in an increase in volatility in many stock markets. The currency market is no exception to this phenomenon, especially given the shaky position of many national balance sheets (read Three Low Beta ETFs for the Uncertain Market).
Deepening worries over the overall health of the global economy has caused massive sell offs in the risky asset segment. As a result, the equity markets could not extend their gains that they posted in the first quarter of 2012.
This risk aversion had increased the demand for the U.S Dollar (USD) denominated Treasury bonds due to their ‘safe haven’ nature. Due to this, the yields were depressed and the USD appreciated against other major currencies (see Where Do You Go For Yield?).
In particular, from the currency ETF space, things have not been at their best this fiscal year. Most exchange traded products from this segment have slumped badly on a year-to-date basis. However, some ETF from this space have shown resilience in the face of troubled times and have managed to beat out the dollar in year-to-date terms.
Below, we highlight three funds that have had a solid start to the year and could be worth a closer look by investors searching to either short some strong performers or go long based on strong momentum:
CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA)
Launched in June of 2006, FXA tracks the relative movement of the Australian dollar (AUD) relative to the USD. The funds in this product are denominated in AUD and kept in a bank account, and the interest thus received is used to pay for the expenses and fees of the fund. The fund looks to generate returns through the bank interest and any capital appreciation that may occur on account of AUD appreciating versus the USD.
As far as the current scenario is concerned, the benchmark interest rate is 3.50% and the Consumer Price Index has jumped by 10 basis points for the March 2012 quarter. The Reserve Bank of Australia (RBA) had slashed interest rates four times since November 2011 onwards.
The rate cuts add up to 1.25% cumulative. From its 3 year high at 4.75%, the interest rates have come down to 3.50% on account of these four subsequent rate cuts.
The falling commodity prices have gone a long way in hurting the Australian economy as industrial consumption demand for these commodities have significantly reduced from manufacturing powerhouses like China (read China Small Cap ETFs Holding Their Ground).
Still, due to the relatively high interest rate, the RBA will have a number of policy options going forward, giving it more room than many of its counterparts.
Nevertheless, FXA has risen by about 4.2% year-to-date, a solid figure given the uncertainty in the Australian market. Additionally, due to the high interest rate, the yield on this fund looks to also be supportive of further gains.
Yet with that being said, the product does have Zacks ETF Rank of 4 or ‘Sell’ so gains may be hard to come by in the near future. However, it does remain one of the best options for investing in the space, charging just 40 basis points in fees and possessing a relatively high average trading volume as well (see Four Vanguard ETFs for Long-Term Investors).
Market Vectors Indian Rupee/USD ETN (NYSEARCA:INR)
Launched in March of 2008, the Market Vectors Indian Rupee/USD is an Exchange traded note issued by Morgan Stanley that seeks to capture the essence of the S&P Indian Rupee Total Return Index. The index tracks the performance of the Rupee relative to the USD.
The Indian economy has been under some pressure as of late although the rupee has held up rather well. INR has added about 2.4% so far in 2012, which is relatively solid given the uncertainty in the country’s economy (see Indian Rupee ETFs: Is The Slide Over?).
However, unlike many other economies in the region, India’s problems are mainly home driven rather than due to external factors. Policy paralysis, weak infrastructure and little to no structural reforms in the nation are all cited as some of the biggest roadblocks to more Indian growth and do not appear to be going away anytime soon.
Furthermore, a GDP growth rate at a nine year low of 5.3% for the January-March quarter proves this, while a high current account and fiscal deficit do not help matters either.
Amidst all negativity, it is believed that the worst for the Indian Rupee might be over. The currency is showing signs of recovery and the Indian stock markets are consolidating and bottoming out on market rallies.
Growth in Industrial production also hints towards an economic recovery. However, little can be said about its implications in the actual GDP numbers (read Emerging Market Small Cap ETFs: Freefall Continues).
Given these facts, INR might be an interesting choice for investors. The product has $2.62 million in total assets and charges investors 55 basis points in fees and expenses. The product being an Exchange traded note, it will not have any tracking error as it does not incur buying and selling of securities. However, it is subject to credit risk of the issuer.
The senior debt credit rating of the issues stands at A+ and A2 by rating agencies Standard and Poor and Moody’s, respectively, but S&P has a negative outlook towards its long-term debt. Year to date, the note has added about 2.4% and currently has a Zacks ETF Rank of Strong Buy or 1, suggesting it could be poised for more gains in the months ahead as well.
PowerShares Deutsche Bank G10 Currency Harvest ETF (NYSEARCA:DBV)
DBV is an actively managed ETF, which relies on a long short portfolio strategy. It works with a small universe of currencies of countries that comprise the G-10 nations. These currencies include U.S Dollars, Euro, Japanese Yen, Canadian Dollars, Swiss Francs, British Pound, Australian Dollar, New Zealand Dollar, Norwegian Krone and Swedish Krona.
It basically tries to profit from the difference in interest rates of these countries. The strategy involves borrowing funds in a currency offering low interest rate and parks the proceeds in a currency that offer high interest rates.
Thus the ETF tends to profit from this discrepancy in the interest rates between the various economies. This type of trade is known as “Carry Trade” which involves active portfolio monitoring (readBet Against the dollar with These Three Currency ETFs).
This could be an intriguing investment style as some studies have found that high yielding currencies tend to hold up better than their low rate counterparts. If this trend continues, it could provide the fund with solid returns that are generally uncorrelated to the broad market. In fact, DBV is up by about 4.2% so far in 2012.
The ETF debuted in September of 2006 and since then has managed to amass $294.05 million. It charges a steep expense ratio of 75 basis points mainly thanks to its actively management. The product also has a solid volume level as, on average, approximately 187,000 shares of DBV exchange hands on a daily basis.
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