Commodity Currency ETFs In Trouble As Dollar Resumes Rally

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Includes: BZF, CCX, FXA, FXC, USD, USDU, UUP
by: Zacks Funds

After a strong start to the second quarter, commodities were hit by the resumption of the U.S. dollar rally over the last couple of weeks. In particular, oil and copper have returned to their declining trend, triggering off worries over inflation and chaos in the currency market.

Notably, two ETFs offering exposure to U.S. dollar (NYSEARCA:USD) against a basket of world currencies - PowerShares DB US Dollar Bullish Fund (NYSEARCA:UUP) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA:USDU) - gained over 4% over the past 10 days.

This is especially true as a string of upbeat economic data boosted the near-term Fed rate hike bets. Market experts forecast dollar to appreciate against a basket of major currencies in the coming months providing a boost to dollar ETFs. This would be largely due to diverging monetary policies in the U.S. and its peers like Europe and Japan as well as signs of reversal in the economic growth after a soft patch in the first quarter.

Further, the renewed Greek debt drama and unrest in Spain are weighing on the euro. All these situations have created a selling pressure in many commodity currencies, indicating extreme bearishness if the current trend persists. The currencies of oil-exporting nations were the hardest hit as Brent oil plunged nearly 5% since its peak for the year on May 6.

The Russian ruble stole the show, plunging 7% from its peak in May against the U.S. dollar while other oil-linked currencies such as the Canadian dollar, Norway's krone, and the Australian dollar slipped 4%, 6%, and 5%, respectively, after hitting this year's peak in early May.

Given this, commodity currencies will likely see sluggish trading in the months ahead. Below, we take a closer look at some of the ETFs providing exposure to the commodity currencies that investors should avoid for the time being.

WisdomTree Commodity Currency Fund (NYSE:CCX)

This fund provides investors exposure to the currencies and money market rates of countries commonly known as commodity exporters. It seeks to achieve total returns reflective of both money market rates in select commodity-producing countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar.

The product invests in eight currencies - Australian Dollar, Brazilian Real, Canadian Dollar, Chilean Peso, Norwegian Krone, New Zealand Dollar, Russian Ruble, and South African Rand - almost in equal proportions. The fund is often overlooked by investors as depicted by its AUM of just $6.8 billion and average daily volume of about 3,000 shares. It charges 55 bps in annual fees. The ETF was down 3.8% over the past 10 days and has a Zacks ETF Rank of 4 or 'Sell' rating with a High risk outlook.

Guggenheim CurrencyShares Canadian Dollar Trust ETF (NYSEARCA:FXC)

Like FXA, this ETF provides investors exposure to the Canadian dollar relative to the U.S. dollar. It tracks the price of the Canadian dollar net of Trust expenses, which are expected to be paid from interest earned on the deposited Canadian dollars. As far as the fund's structure is concerned, the product charges 40 bps a year in fees and sees moderate volume of about 90,000 shares a day. The ETF has accumulated $218.7 million in its asset base and lost about 4% over the past 10 days. FXC has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook.

WisdomTree Brazilian Real Strategy Fund (NYSEARCA:BZF)

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 $17.7 million and 22,000 shares, respectively. The product charges 45 bps in annual fees and was down 4.7% in the last 10 days. It has a Zacks ETF Rank of 5 or 'Strong Sell' rating with a High risk outlook.

Guggenheim CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA)

This fund offers a great play to capitalize the future rise in the Australian dollar relative to 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 $198.8 million in its asset base while trades in moderate volume of 69,000 shares per day on average. It has an expense ratio of 0.40% and lost 5.3% over the past 10 days. The fund has a Zacks ETF Rank of 4 with a High risk outlook.

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