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Investing in Currency ETFs

Written By Luke Burgess

Posted February 10, 2009

President Barack Obama’s new economic stimulus package will likely push the total debt and financial obligations of the United States government to over $60 trillion!

To put that figure into perspective, let me put it another way: If you were to spend $1,000,000 per day, it would take over 160,000 years to spend $60 trillion.

The shear size of this financial responsibility is fair grounds to question the solvency of the United States and threatens the role of the U.S. dollar as the world’s dominant reserve currency. The result of this debt will ultimately lead to a lower market value for the U.S. dollar and possible collapse.

As a hedge against the devaluation of the U.S. dollar, the best bet is, of course, gold. However, there are several currency ETFs that can help set up additional hedge support against a falling U.S. dollar.

Currency ETFs for a Falling U.S. Dollar

One way to play a falling U.S. dollar is with non-U.S. dollar currency ETFs and ETNs (exchange-traded notes).

These products are hedged against the dollar by having long exposure to one or more foreign currencies, which generally trade opposite to the U.S. dollar.

Below is a list of currently available non-U.S. collar currency ETFs and their ticker symbols. All ETFs and ETNs on the list trade on the NYSE.

Non-U.S. Dollar Currency ETF List

  • CurrencyShares Australian Dollar Trust ETF [FXA]
  • CurrencyShares British Pound Sterling Trust ETF [FXB]
  • CurrencyShares Canadian Dollar Trust ETF [FXC]
  • CurrencyShares Euro Trust ETF [FXE]
  • CurrencyShares Japanese Yen Trust ETF [FXY]
  • CurrencyShares Mexican Peso Trust ETF [FXM]
  • CurrencyShares Russian Ruble Trust ETF [XRU]
  • CurrencyShares Swedish Krona Trust ETF [FXS]
  • CurrencyShares Swiss Franc Trust ETF [FXF]
  • ELEMENTS Australian Dollar ETN [ADE]
  • ELEMENTS British Pound ETN [EGB]
  • ELEMENTS Canadian Dollar ETN [CUD]
  • ELEMENTS Swiss Franc ETN [SZE]
  • iPath EURO/USD Exchange Rate ETN [ERO]
  • iPath GBP/USD Exchange Rate ETN [GBB]
  • iPath JPY/USD Exchange Rate ETN [JYN]
  • Barclays GEMS Asia-8 ETN [AYT]
  • Barclays GEMS Index ETN [JEM]
  • Barclays Asian & Gulf Currency Revaluation ETN [PGD]
  • Market Vectors-Chinese Renminbi/USD ETN [CNY]
  • Market Vectors-Indian Rupee/USD ETN [INR]
  • Market Vectors-Double Long Euro ETN [URR]
  • ProShares Ultra Euro ETF [ULE]
  • ProShares Ultra Yen ETF [YCL]
  • WisdomTree Dreyfus Euro ETF [EU]
  • WisdomTree Dreyfus Japanese Yen ETF [JYF]
  • WisdomTree Dreyfus Brazilian Real ETF [BZF]
  • WisdomTree Dreyfus Chinese Yuan ETF [CYB]
  • WisdomTree Dreyfus Indian Rupee ETF [ICN]
  • WisdomTree Dreyfus New Zealand Dollar ETF [BNZ]
  • WisdomTree Dreyfus South African Rand ETF [SZR]

These currency ETFs have their ups and downs as a hedge against a falling U.S. dollar.

On the up side, they provide an easy, potentially very profitable vehicle for investors looking for currency diversification. They’re easy to trade, have limit orders, and some pay yields.

On the down side, however, investing in a single foreign currency has strong, focused exposure to risk associated with the currency and issuing country, which could be subject to any number of positive and/or negative fundamentals.

In my opinion, these non-U.S. Dollar ETFs hold more downside than up because of the strong and focused risk associated with foreign currencies and their issuing countries. Nevertheless, there are a few inverse U.S. dollar ETFs that I believe are a better investment hedge against a falling U.S. dollar.


Inverse U.S. Dollar ETFs

An inverse fund profits from a decline in the value of an underlying benchmark. In the case of an inverse U.S. dollar fund, the underlying benchmark is usually the U.S. Dollar Index.

The U.S. Dollar Index is a trade-weighted measure of the value of the U.S. dollar relative to a basket of six foreign currencies. The six currencies and their trade weights are:

 Components of the U.S. Dollar Index
 Euro  57.6%
 Japanese yen
 British pound
 Canadian dollar
 Swedish krona
 Swiss franc

The main advantage of using the U.S. Dollar Index as the benchmark in an inverse U.S. dollar fund is the diluted exposure to risk associated with individual currencies and issuing countries, even though the Index is heavy with the euro.

There is also another kind of U.S. dollar index used by the Federal Reserve called the Trade-Weighted U.S. Dollar Index. It was created to better reflect the dollar’s value against foreign currencies based on how competitive U.S. goods are compared to other countries. The Trade-Weighted U.S. Dollar Index comprises 26 world currencies, but is still heavy in the euro, Canadian dollar, and Chinese yuan.

Unfortunately, as it stands today, there is no fund that tracks the Trade-Weighted U.S. Dollar Index. So we have to stick with what we’ve got.

There are four main U.S. dollar inverse funds on the market today. Let’s briefly talk about them.

Horizons BetaPro U.S. Dollar Bear Plus ETF [TSX: HDU]

The Horizons BetaPro U.S. Dollar Bear Plus ETF returns daily investment results equal to 200% the daily inverse performance of a U.S. dollar denominated Canadian dollar futures contract for the next delivery month.

This is the only U.S. dollar inverse ETF that does not track the U.S. Dollar Index and may be a better investment for investors especially long the Canadian dollar and especially short the U.S. dollar.

Falling U.S. Dollar ProFunds [FDPIX]

The Falling U.S. Dollar ProFunds provides inverse exposure to the U.S. Dollar Index. This fund seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily price performance of the U.S. Dollar Index.

This would make a great hedge against a falling U.S. dollar. However, it is not an ETF. And there is another product on the market that is exactly the same but a little bit easier to trade.

PowerShares DB US Dollar Index Bearish ETF [NYSE: UDN]

The PowerShares DB US Dollar Bearish Fund is based on the Deutsche Bank Short U.S. Dollar Index Futures Index, which is designed to replicate the performance of being short the U.S. Dollar Index.

The advantage of the PowerShares inverse dollar fund is that it’s an ETF. And if you’re looking for a simple and limited-risk ETF to hold as a hedge against a falling U.S. dollar, the PowerShares DB U.S. Dollar Bearish ETF is probably your best bet.

However, if you’re a bit braver, which I believe we have grounds to be, I suggest that you check out the Direxion Dollar Bear 2.5x Fund.

Direxion Dollar Bear 2.5X Fund [DXDDX]

The Dollar Bear 2.5x Fund also provides inverse exposure to the U.S. Dollar Index. The fund seeks daily investment results, before fees and expenses, that correspond to 250% of the inverse (opposite) of the daily price performance of the U.S. Dollar Index.
Unfortunately, this is not an ETF. However, you should be able to easily purchase it through any of the major U.S. brokers.

If you’re looking for a long-term dollar hedge for your portfolio and currently have no such exposure, it does make sense to add some now.

Good Investing,


Luke Burgess
Managing Editor, Gold World
Investment Director, Hard Money Millionaire

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