The global market upheaval triggered off by China hit the most risky asset classes at the start of 2016, instigating a flight to safety. Also, the uncertainty in the oil patch and growth worries in Japan and the eurozone made matters worse. Back home, the economic health suffered as several recent readings came in soft.
The US economy cooled off in Q4, with the annualized growth pace of 0.7% missing the market estimate of 0.8% and falling sharply from the prior quarter's expansion of 2%. A stronger greenback, sluggish manufacturing activity and weak consumer spending weighed on U.S. economic growth. This held the Fed back from showing too much aggression on the policy tightening issue.
As a result, the dollar exchange-traded fund PowerShares DB USD Bull ETF (NYSEARCA:UUP) has lost about 1.5% so far this year (as of February 22, 2016), while most commodity-centric currencies turned out as surprise winners. A weak dollar has mainly supported the commodity rally, since most of the commodities are linked to the dollar.
Also, several precious metals have advanced this year on safe-haven demand, while oil prices have logged gains occasionally on speculation of output cuts. Industrial metals like copper has also seen some strength after Chinese imports of the metal increased last month.
Though we believe the trend will reverse once the bulls are back with a bang, at the current level many investors may try to remove some of the dollar risk from their portfolio and focus on currency ETFs that are outshining the dollar.
WisdomTree Brazilian Real ETF (NYSEARCA:BZF) - Up 3.33% YTD
The Brazilian real was one of the worst-performing currencies in the last one-year period, losing about 18.3% thanks to the nation's deteriorating economic fundamentals. But fading hopes of further rate hikes and a commodity market bounce added to the real strength to start 2016.
Since Brazil is a commodity-centric economy, the recent surge in real is self-explanatory. Talks about China, one of Brazil's key trading partners, shoring up its stock market "after a key official was replaced at the Asian nation's securities regulator" also boosted the real.
This fund seeks to achieve total returns reflective of both money market rates in Brazil available to foreign investors and changes in value of the Brazilian real relative to the U.S. dollar. Both AUM and average daily volume are paltry at $15.2 million and 10,000 shares, respectively. The product charges 45 bps in annual fees.
It has a Zacks ETF Rank of 5 or "Strong Sell" rating with a High risk outlook. However, the fund added about 7.6% in the last one month (as of February 22, 2016).
CurrencyShares Canadian Dollar Trust ETF (NYSEARCA:FXC) - Up 0.92% YTD
Occasional spikes in energy prices helped oil-rich Canada's currency, which has gained 0.9% so far this year and was up 4.2% in the last one month frame. The $211.4 million fund trades at volumes of 80,000 shares a day. It charges 40 bps in fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see all currency ETFs here).
WisdomTree Emerging Currency ETF (NYSEARCA:CEW) - Down 0.24% YTD
Thanks to commodity strength, even this emerging market currencies' ETF performed better than the greenback. Currently, the fund has a focus on Asian currencies (45%), followed by Europe, the Middle East & Africa (30%) and Latin America (25%).
This currency ETF also sees solid volume of about 40,000 shares a day on comparable $38.2 million in AUM. CEW charges 55 bps in fees. It advanced about 3.5% in the last one month (as of February 22, 2016).
CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA) - Down 0.7% YTD
Australia is yet another commodity-rich nation, and thus, its currency posted lower losses than UUP this year.
This fund offers a great play to capitalize on the future rise in the Australian dollar against the U.S. dollar. It tracks the movement of the Australian dollar relative to the USD, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Australian dollars. The product has amassed $174.0 million in its asset base, while it trades in moderate volume of 40,000 shares per day on average. It has an expense ratio of 0.40% and was up 3.3% in the last one month.