Common Theme Among Highest Returning Currency ETFs: Natural Resources

At last count, you could invest in 15 different currencies through 24 unique ETFs. The yen and the euro have more than their fair share of possibilities on investments like the Euro Currency Trust (FXE), the Ultra Euro ProShares (ULE) and the UltraShort Euro ProShares (EUO).

Yet in the first 5 months of the year, the 5 currency ETFs with the highest returns seem to share several things in common. First, each represents a country that boasts higher interest rates than the yen or the U.S. dollar.

Top 5 Currency ETFs (January 1-May 30)
					YTD%
Wisdom Tree South African Rand (SZR)					22%
Wisdom Tree Brazilian Real (BZF)					14%
CurrencyShares Australian Dollar (FXA)					13%
WisdomTree New Zealand Dollar (BNZ)					11%
CurrencyShares Canadian Dollar (FXC)					11%

While it's not surprising that currencies around the world are gaining on the greenback, it's not a simple function of hedging against its "inevitable" fall. Rather, it appears that investors are winding up the carry trades by "going short" the yen or U.S. dollar while simultaneously "going long" higher yielding currencies. (That's a sign of risk taking... not risk aversion!)

The second thing that I noticed about this list is the fact that each country is rich in natural resources. Commodity inflation as well as the carry trade, then, seems to be telling us what's important.

Perhaps we shouldn't be surprised by stock market performance in these same countries either. South Africa (EZA), Canada (EWC), Brazil (EWZ) and Australia (EWA) have significantly outpaced the Vanguard FTSE All World exc U.S. (VEU).

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Alan Young:]

Great idea, thanks for the list and the thematic insight.
My only concern is that currency is so volatile: a big overnight rally in the US dollar could make a mess of these investments, and even people who understand the risks fairly well can be caught without warning.

Jun 05 01:46 PM

[prairiedog555:]

To go even farther, look at the 1and 2yr charts of EWC vs FXC and
EWA vs FXA.
It is pretty clear that there is a direct connection.

Jun 09 09:14 AM