Currency ETFs As Commodity Proxies

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Includes: AUNZ, SZR
by: Roger Nusbaum

I've mentioned a few times over the years that it would become easier to build very narrow portfolios with very specific effects by using ETFs (this was not something particularly clever but more of a statement of the obvious). Certainly this has come to pass and and will continue to evolve further.

One aspect of this that I write about often is funds being proxies for other things. One example I mentioned a few days ago is the possibility that the WisdomTree South Africa Currency ETF (NYSE:SZR) could be a proxy for gold:

On Cashin' In Jonathan Hoenig suggested the South African rand via the WisdomTree product that has ticker SZR. That one might be a bit of a watch out. The rand has some deficit and inflation problems and somehow has managed to go down YTD against the greenback by more than 10%.

For now this does not exist as gold, measured by GLD which is a client holding, seems to almost have a negative correlation. If or when South Africa gets a handle on some of its imbalances and inflation, the correlation between the two could go up.

If it does happen (I'm not trying to assign any probability with this post) then think about what what SZR would become; something that tracks gold and yields 6 or 7%. This type of thing would be of interest even if it ends up not being for you.

As you read that you might wonder doesn't the Australian dollar (NYSE:FXA) already do that? To a point, yes it does, but as highly as I think of Australia, and I do own the currency, this becomes a point where people risk allocating too much to one country.

Another example of a proxy in the making, in my opinion, might be the New Zealand Dollar ETF (BNZ). Many people think of the kiwi as being a commodity currency (I referred to it this way in the early days of this site) but that is not quite right. New Zealand produces a lot of dairy products, meat and wool. The government is very proactive in trying to increase its exports, it has a free trade agreement with China, and it seems to me that the kiwi could be a proxy for the burgeoning of the food theme without taking on the same volatility as an agriculture stock. I've had a lot of luck with Monsanto (NYSE:MON) but that type of stock is not right for everyone.

The kiwi faces plenty of obstacles pertaining to deficits and imbalances but these issues are not new and have not crippled the currency (yet?). For now I do not own BNZ and I don't know if I will. The idea of BNZ being a low-impact way to buy into the global food theme is just a bit of process/theory.

This post isn't about buying SZR or BNZ; it is about recognizing themes and exploring whether there might be any other ways in that could increase volatility, or decrease it, depending on your own tolerances or the maturity of the cycle.