The currency segment of the exchange traded fund industry has been standing in the shadows of the fixed-income, commodities and equity ETFs. Why has this sector been ignored by investors lately?
"Currency funds are a poor long-term investment due to paltry expected returns," Michael Rawson, analyst at Morningstar said, adding that low cash yields are likely to underperform even inflation over time.
Total assets in U.S. exchange traded funds and notes stood at $1.2 trillion at the end of April. Currency ETFs held $6 billion and currency ETNs accounted for $206 million, according to data from the ETF Industry Association.
The currency ETFs let individuals trade these markets, although currency speculation is notoriously difficult.
Although the currency or forex market trades about $4 trillion per day, low yields have taken the gusto out of currency ETFs. Furthermore, foreign exchange gains are included in some international equity and bond portfolios, which makes currency ETFs void for certain investors and financial advisers, reports Gertrude Chavez-Dreyfuss for Reuters.
Currency ETFs are investments in interest-yielding bank accounts focused on the currency it tracks, and investors get cash returns minus or plus any change in exchange rates. Also, currency ETFs, which trade like stocks, track the change in the value of the underlying currency against the U.S. dollar. Plus, certain foreign countries have different tax rates for gains, so this has to be factored into the equation.
According to Morninstar data, total returns for currency ETFs in the first quarter were 2.08 % and for March the sector incurred losses of 1.48 %. Net assets in currency ETFs were $5 billion, accounting for just 0.4 % of ETF assets totaling $1.2 trillion. In the first quarter, currency ETFs had net outflows of $1.479 billion and about $461 million outflows in March.
To compare, equities account for 70% of the total ETF assets, fixed income about 17% and commodities at 12%, reports Dreyfuss.
Some investors use currency ETFs to hedge their portfolio. Furthermore, U.S. investors with ETFs following non-U.S. assets most likely have sizable exposure to foreign currencies, one reason some choose not to invest in pure currency ETFs.
Going forward, some analysts believe there is potential in emerging market currencies. For example, WisdomTree Asset Management Inc., has positioned itself in emerging markets through ETFs that provide not only currency but also local debt exposure.
Various currency ETFs:
- CurrencyShares Euro Trust (NYSEARCA:FXE)
- CurrencyShares Australian Dollar (NYSEARCA:FXA)
- WisdomeTree Emerging Currency (NYSEARCA:CEW)
- WisdomTree Brazilian Real (NYSEARCA:BZF)
- PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV)
Tisha Guerrero contributed to this article
Read the disclaimer; Tom Lydon is a board member of the funds for Guggenheim Investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.