Thinking About Currency ETFs and Sovereign Debt

Ok, theory time.

The other day I passed along a snippet about Rydex adding four more currency funds; a couple would be new ground and a couple would not.

I don't know how off the beaten path the ETF industry will get with currency funds, but there are going to be a quite a few currencies that will continue to go up a lot against the dollar, not necessarily because of the dollar's problems but because of what is happening on the ground in some of these places.

In a practical sense I believe in adding some currency into a diversified portfolio, be that actual currency (via ETFs) or using short-term sovereign debt, but the dollar will have periods where it outperforms some of the biggies.

If Europe is a little behind us right now in its economic cycle and their recession is worse than ours, how do you think EUR/USD is going to do? In 2018 we may look at a ten year chart of EUR/USD see that it was a one way-trade but that would not preclude the dollar going on a run versus the euro for a couple of years.

So could a portfolio of currencies be put together using ETFs and short-term sovereign debt in such a way where either it gives broad equity market like returns or one of those 80% of the upside with a quarter of the volatility?

Less volatility is a pretty good bet, currencies are generally less volatile than equities; if you buy the Turkish lira go small.

The idea of some of the currencies, ex the big boys, being in their own world, becoming more globally relevant and going up against the dollar is a theme I've been writing about for a while. Given the visibility for US equity returns to continue to be below normal for a while (another theme I've maybe worn out) maybe some folks should pursue this route?

Many of these countries have fewer moving parts, just one or two big industries, a drive for prosperity and the visibility for that prosperity. So, everyone in the pool?

Back in the real world, probably not -- for reasons that include access to product, having the experience how to choose many different destinations so as to be diversified, how to know when to come out of one destination and some others.

But the reasons listed above as to why you should not go all in does not argue against modest exposure. Putting 5% of your bond portfolio into sovereign debt from Chile, another 5% into the New Zealand currency ETF (BNZ) and 5% into something that replicates the Kazakhstan tenge and the rest into more plain vanilla is not the single worst thing you could do.

Another bit of evolution in this space is that on the heels of the CBOE creating the Oil Volatility Index [OVX], an oil VIX, the CBOE will soon have volatility indexes on other commodities and currencies. These won't be easy to figure and may never be usable for most folks, but this sort of innovation opens many possibilities for all manner of investors.

Comments

[xander]

what etfs or cefs are available for foreign sovereign debt? anyone?

[Elliott]

xander: Check out the Nuveen Multi-Currency Short-Term Government Income Fund (symbol JGT). Has a good mix of foreign government bonds, AAA corporate bonds and Fed Home Loan Bank notes. I know what you're thinking, the Home Loan notes are AAA and have no credit risk. Currently selling at a 12.9% discount to NAV and has a 10.4% annual yield, paid quarterly.

[cmsrlh null]

I own a little PCY

[RogerNusbaum]

you could look at EMB and EDD--no position