Currency markets had an eventful 2014 with the U.S. dollar touching multi-year highs against a basket of major currencies. Improving U.S. economic data, escalating geopolitical tensions, diverging central bank policies around the world and chances of a sooner-than-expected rate tightening cycle in the U.S. were some of the factors contributing to a stronger greenback.
In fact, divergence in monetary policies across the globe was one of the primary factors for the strong advance in dollar this year against major currencies. While the Fed has wrapped up its QE program and is expected to start raising rates sometime this year, central banks of some of the major developed nations have stepped up their monetary stimulus programs to stimulate their struggling economies.
Stronger U.S. recovery and speculations of a faster-than-expected rate hike are leading investors to pull out capital from emerging markets and pour it into U.S. stocks, causing the currencies of these nations to take a plunge.
Given this, we have highlighted two of the best performing and worst performing currency ETFs of 2014 below. These were big movers in the currency market, and undoubtedly investors are expecting big things out of these currencies in 2015 as well:
Best Currency ETFs of 2014
Market Vectors Indian Rupee/USD ETN (NYSEARCA:INR)
Indian equity markets have posted stellar performances this year driven by optimism over the new pro-reform, business-friendly government led by Prime Minister Narendra Modi. In fact, the Indian economy has been witnessing improving macroeconomic conditions led by better-than-expected corporate earnings, a falling inflation level and improving manufacturing and industrial production. Moreover, steps taken by the RBI governor have been successful in narrowing the current account deficit.
These factors led the Indian rupee to be the best performing major currency worldwide against the dollar during 2014 and INR to be the best currency ETF this year.
The fund tracks the performance of the S&P Indian Rupee Total Return Index, providing exposure to exchange rate movement of the U.S. Dollar against the Indian Rupee. The product is, however, quite unpopular and illiquid with an asset base of under $2 million and average trading volume of 27,000 shares a day.
The fund charges 55 basis points as fees and has returned 14% this year. INR currently has a Zacks ETF Rank #3 or Hold rating.
PowerShares DB USD Bull ETF (NYSEARCA:UUP)
Thanks to a stronger U.S. economic recovery led by higher-than-expected U.S. GDP growth numbers, renewed optimism in housing activity, continued job creation and rising consumer confidence combined with global factors, the U.S. dollar emerged as a strong currency this year.
The fund tracks the performance of the Deutsche Bank Long US Dollar Index (USDX) Futures Index to provide exposure to the performance of U.S. Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
In terms of holdings, UUP allocates nearly 58% in Euro, while 25% collectively in Japanese Yen and British Pound. The fund has so far managed an asset base of $959.9 million and sees an average daily volume of 1.8 million shares. It charges 80 bps in total fees and expenses. The fund has added 11.3% in 2014 and has a Zacks ETF Rank of 2 or 'Buy' rating with Medium risk outlook.
Worst Currency ETFs of 2014
CurrencyShares Swedish Krona Trust ETF (NYSEARCA:FXS)
The Swedish Krona has been among the worst performing currencies in 2014 against the greenback, with FXS plunging 18% this year. This is especially true as the currency is struggling badly in the wake of record low interest rates and deflationary pressures. The central bank's unexpected move to slash interest rates to zero in October in order to fight deflation further aggravated the situation and led the currency to struggle badly against the U.S. Dollar.
The fund tracks the price of the Swedish Krona relative to the U.S. Dollar managing an asset base of $25.3 million. The fund is quite illiquid with average daily volume of just 2,000 shares. The fund charges 40 basis points as fees and currently has a Zacks ETF Rank #3 or Hold rating.
CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY)
Though the Yen was performing well in the first part of the year due to its safe haven appeal in the wake of rising geopolitical tensions, it plummeted to a seven-year low in the second half due to an ultra loose monetary policy adopted by the Bank of Japan (BoJ). Weakening growth conditions and sliding consumer prices led the BoJ to expand its monetary policy in 2014 leading to a slumping Yen.
FXY measures the relative values of two currencies, the Japanese Yen against the U.S. Dollar. The fund gains in value as the Yen appreciates relative to the Dollar. The fund manages an asset base of $105 million, charges 40 basis points as fees and trades with good volumes of 200,000 shares a day.
FXY plunged roughly 13.7% for 2014, continuing its long term track record of weakness and pushing its two year loss to -27%.