Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

For ETF Investors, Currency Exposure Matters (More Than You Might Think)

Fri, Oct 28, 9:14 AM ET, by Michael Johnston

Equity markets have taken investors for a wild ride over the past three months with chaotic trading dominating virtually every nook and corner of Wall Street. Amidst the volatility, investors have been seeking out refuge and fleeing to “safer” asset classes; although rational, this approach inevitability overlooks certain corners of the market that may in fact be a lot less riskier than most investors might think. Currency exposure in particular is often times overlooked, especially when stock markets are unfriendly, due to preconceived notions about the risks and rewards associated with this misunderstood asset class.

When picking an ETF investment, many advisors don’t give a whole lot of thought to currency exposure, often times deeming it as far too risky or complex for their portfolio’s needs. In fact, many investors may not have a strong opinion on the Brazilian real, Japanese yuan, or the Australian dollar [see Currency ETFs Of Commodity Dependent Nations]. But those same investors often have exposure to those currencies-whether they realize it or not–through investments in assets denominated in those currencies.

Exposure to exchange rates is not reserved for those trading in ultra-leveraged forex accounts. The reality is that the vast majority of investors maintain significant exposure to international currencies in their portfolios through international stocks. Going long in Brazilian equities, for example, inherently includes a long position in the Brazilian real relative to the U.S. dollar. If the Brazilian currency appreciates, the returns realized by U.S. investors will be enhanced–and vice versa (more on this below).

Decisions on whether to accept risks associated with currency exposure can be big ones, as exchange rate movements can potentially have a huge impact on bottom line risk / return profiles. Below we highlight three noteworthy examples that demonstrate the impact of currency exposure on ETFs:

1. ELD vs. EMB

When it comes to emerging markets exposure, many investors have embraced the exchange-traded product structure as a preferred means of rounding out exposure to both the equity and debt markets of developing nations. When comparing two popular offerings from the Emerging Markets Bonds ETFdb Category, the WisdomTree Emerging Markets Local Debt Fund (ELD) and the iShares JPMorgan Emerging Bond (EMB) appear almost identical after a quick glance.

Both products feature a similar split between foreign government debt and corporate bonds, and similar debt issues are even found in both of the fund’s top holdings [try our Free ETF Head-To-Head Tool]. However, there is a a key difference between these products, and it has a rather significant impact on bottom line returns; ELD’s debt holdings are denominated in the local currency of the issuers, while EMB provides exposure to U.S. dollar denominated emerging markets debt. Consider their year-to-date performances (as of 10/29/2011), ELD is down about 4%, while EMB is up about 1%. This difference in returns is largely attributed to the fact that the U.S. dollar has appreciated quite a bit over the last few months as investors have sought out this safe haven currency amidst the market turmoil [see Getting Creative With Currency ETFs].

2. DBBR vs. EWZ

Fluctuations across foreign exchange rates can have a material impact on international products which have currency exposure. Consider for example the popular iShares MSCI Brazil Index Fund (EWZ), which provides exposure to the performance of the Brazilian equity market, versus the recently launched MSCI Brazil Currency-Hedged Equity Fund (DBBR):

In the table above, notice the performance differences between the two; this variation in returns is quite significant when we consider the fact that DBBR provides exposure to the exact same basket of securities as EWZ. The distinguishing feature, however, is that DBBR is designed to provide exposure to Brazilian equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Brazilian real [see Currency ETFs: A Better Way To Play The BRIC]. The vast difference in performance between DBBR and EWZ across different time periods demonstrates the potentially adverse effects of currency fluctuations.

3. Pure Currency ETFs With Stellar Returns

Many investors shy away from currency investing, influenced by perceptions of extreme volatility and a zero-sum game. While ultra-leveraged forex trading does introduce potential for significant fluctuations–and likely losses after fees are considered–investors with a keen eye for spotting trends in macroeconomic developments can certainly stand to benefit from currency ETFs.

Two ETFs from the Currency ETFdb Category have delivered some stellar returns over the last five years, leaving popular stock and bond products in their dust:

Ticker ETF 5-Year Gain (Loss)
FXA CurrencyShares Australian Dollar Trust 66.1%
FXF CurrencyShares Swiss Franc Trust 42.6%
SPY SPDR S&P 500 -1.3%
EEM MSCI Emerging Index Fund 19.5%
AGG Barclays Aggregate Bond Fund 35.4%
As of 10/21/2011

Consider the five year returns for the Australian dollar and Swiss franc versus three popular broad-based benchmarks in the table above. The impressive returns of FXA and FXF dwarf the performances of both domestic and international equities, even surpassing a popular bond market benchmark [see Inside The Not-So-Simple Currency ETFs]. While theres no guarantee that the Aussie dollar will continues its stellar uptrend for five more years, it’s most certainly worth noting that currency investing can potentially enhance your portfolio’s bottom line returns over the long haul.

[For more ETF analysis sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.


SDI Glossary: "Bond" Definition
SDI Glossary: "Debt" Definition
SDI Glossary: "Equity" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "iShares" Definition
This Article's Word Cloud:   Australian   Brazilian   Consider   Currency   DBBR   ETFs   Emerging   Fund   MSCI   When   about   between   both   bottom   currency   debt   difference   dollar   exchange   exposure   fact   five   fluctuations   from   have   impact   international   investors   line   many   market   markets   often   over   performance   popular   potentially   products   provides   returns   same   significant   that   their   this   those   three   time   while   with

| More

FXL Crosses Above Key Moving Average Level
Fri, Oct 24, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the First Trust Technology AlphaDEX Fund ETF (FXL) crossed ...

Shares of DXKW Now Oversold
Fri, Oct 24, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the WisdomTree Korea Hedged Equity Fund ETF (DXKW) entered ...

GMM Crosses Above Key Moving Average Level
Fri, Oct 24, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the SPDR: SYSTEM ERROR ETF (GMM) crossed above their ...

EEMA Makes Notable Cross Below Critical Moving Average
Fri, Oct 24, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the iShares MSCI Emerging Markets Asia ETF (EEMA) crossed ...

Proshares Short MSCI Emerging Markets (EUM) Shares Cross Below 200 DMA
Fri, Oct 24, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the Proshares Short MSCI Emerging Markets ETF (EUM) crossed ...

Intuitive Surgical Takes Over #184 Spot From International Flavors & Fragrances
Fri, Oct 24, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

EWRI Crosses Below Key Moving Average Level
Fri, Oct 24, 11:24 AM ET, by ETF Channel

In trading on Friday, shares of the Guggenheim Russell 1000 Equal Weight ETF (EWRI) crossed ...

Shares of RSXJ Now Oversold
Fri, Oct 24, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the Russia Small-Cap ETF (RSXJ) entered into oversold territory, ...

PowerShares BuyBack Achievers Portfolio Experiences Big Outflow
Fri, Oct 24, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: PKW, LOW, GM, DTV Exchange traded funds (ETFs) trade just ...

iShares J.P. Morgan USD Emerging Markets Bond ETF Experiences Big Inflow
Fri, Oct 24, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: EMB Exchange traded funds (ETFs) trade just like stocks, but ...

VB, COO, TRN, MDVN: Large Inflows Detected at ETF
Fri, Oct 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VB, COO, TRN, MDVN Exchange traded funds (ETFs) trade just ...

XLB, DD, MON, DOW: ETF Inflow Alert
Fri, Oct 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XLB, DD, MON, DOW Exchange traded funds (ETFs) trade just ...

KRE, WAL, TCBI, SBNY: Large Inflows Detected at ETF
Fri, Oct 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: KRE, WAL, TCBI, SBNY Exchange traded funds (ETFs) trade just ...

VHT, CELG, LLY, ACT: Large Outflows Detected at ETF
Fri, Oct 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VHT, CELG, LLY, ACT Exchange traded funds (ETFs) trade just ...

XLI, DHR, EMR, CMI: Large Outflows Detected at ETF
Fri, Oct 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XLI, DHR, EMR, CMI Exchange traded funds (ETFs) trade just ...

iShares MSCI Mexico Capped ETF Experiences Big Outflow
Fri, Oct 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: EWW Exchange traded funds (ETFs) trade just like stocks, but ...

Proshares Ultra Industrials (UXI) Shares Cross Above 200 DMA
Thu, Oct 23, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Proshares Ultra Industrials ETF (UXI) crossed above their ...

BRXX Crowded With Sellers
Thu, Oct 23, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the EGShares Brazil Infrastructure ETF (BRXX) entered into oversold ...

IYJ Crosses Above Key Moving Average Level
Thu, Oct 23, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares U.S. Industrials ETF (IYJ) crossed above their ...

First Trust South Korea AlphaDEX Fund Breaks Above 200-Day Moving Average - Bullish for FKO
Thu, Oct 23, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the First Trust South Korea AlphaDEX Fund ETF (FKO) ...

Stericycle Moves Up In Analyst Rankings, Passing Anadarko Petroleum
Thu, Oct 23, 12:34 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

Vanguard Industrials (VIS) Shares Cross Above 200 DMA
Thu, Oct 23, 11:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Vanguard Industrials ETF (VIS) crossed above their 200 ...

BRF Crowded With Sellers
Thu, Oct 23, 11:34 AM ET, by ETF Channel

In trading on Thursday, shares of the Brazil Small-Cap ETF (BRF) entered into oversold territory, ...

Shares of FBZ Now Oversold
Thu, Oct 23, 11:34 AM ET, by ETF Channel

In trading on Thursday, shares of the First Trust Brazil AlphaDEX Fund ETF (FBZ) entered ...

Vanguard Financials ETF Experiences Big Outflow
Thu, Oct 23, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VFH, COF, BLK, PRU Exchange traded funds (ETFs) trade just ...

IYJ, NSC, PCP, ITW: Large Outflows Detected at ETF
Thu, Oct 23, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IYJ, NSC, PCP, ITW Exchange traded funds (ETFs) trade just ...

SPDR Barclays Convertible Securities ETF Experiences Big Outflow
Thu, Oct 23, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: CWB Exchange traded funds (ETFs) trade just like stocks, but ...

Insiders Pile Into Holdings of AIRR ETF
Thu, Oct 23, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust RBA American Industrial Renaissance ...

Why Parker Hannifin is a Top Socially Responsible Dividend Stock (PH)
Thu, Oct 23, 8:14 AM ET, by ETF Channel

Parker Hannifin Corp. (PH) has been named a Top Socially Responsible Dividend Stock by Dividend ...

Daily Natural Gas Related Bull 3x Shares (GASL) Enters Oversold Territory
Wed, Oct 22, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Daily Natural Gas Related Bull 3x Shares ETF ...

LIT Crowded With Sellers
Wed, Oct 22, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Lithium ETF (LIT) entered into oversold territory, changing ...

KOL Crowded With Sellers
Wed, Oct 22, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Coal ETF (KOL) entered into oversold territory, changing ...

Shares of EEML Now Oversold
Wed, Oct 22, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Emerging Markets Latin America ETF (EEML) ...

ANGL Crosses Above Key Moving Average Level
Wed, Oct 22, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Fallen Angel High Yield Bond ETF (ANGL) crossed ...

Affiliated Managers Group Takes Over #9 Spot From Actavis
Wed, Oct 22, 1:44 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

INKM Crosses Above Key Moving Average Level
Wed, Oct 22, 11:44 AM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR SSgA Income Allocation ETF (INKM) crossed above ...

MDYV Crosses Above Key Moving Average Level
Wed, Oct 22, 11:34 AM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&P 400 Mid Cap Value ETF (MDYV) ...

SRTY Makes Notable Cross Below Critical Moving Average
Wed, Oct 22, 11:34 AM ET, by ETF Channel

In trading on Wednesday, shares of the Proshares UltraPro Short Russell2000 ETF (SRTY) crossed below ...

CSJ: ETF Outflow Alert
Wed, Oct 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: CSJ Exchange traded funds (ETFs) trade just like stocks, but ...

Proshares Short QQQ Experiences Big Inflow
Wed, Oct 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: PSQ Exchange traded funds (ETFs) trade just like stocks, but ...

IVW, AMZN, PG, DIS: Large Inflows Detected at ETF
Wed, Oct 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IVW, AMZN, PG, DIS Exchange traded funds (ETFs) trade just ...

VIS, HON, FDX, GD: ETF Outflow Alert
Wed, Oct 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VIS, HON, FDX, GD Exchange traded funds (ETFs) trade just ...

FXG, KR, PPC, STZ: ETF Inflow Alert
Wed, Oct 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: FXG, KR, PPC, STZ Exchange traded funds (ETFs) trade just ...

18.2% of XOP Holdings Seeing Recent Insider Buys
Wed, Oct 22, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the SPDR S&P Oil & Gas Exploration ...

XHE Crosses Above Key Moving Average Level
Tue, Oct 21, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the SPDR S&P Health Care Equipment ETF (XHE) crossed ...

JPX Makes Notable Cross Below Critical Moving Average
Tue, Oct 21, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Proshares UltraShort MSCI Pacific ex-Japan ETF (JPX) crossed ...

SPDR Russell 1000 (ONEK) Shares Cross Above 200 DMA
Tue, Oct 21, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the SPDR Russell 1000 ETF (ONEK) crossed above their ...

MDIV Crosses Above Key Moving Average Level
Tue, Oct 21, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Multi-Asset Diversified Income Index Fund ETF (MDIV) crossed ...

BBRC Crosses Above Key Moving Average Level
Tue, Oct 21, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the EGShares FTSE Beyond BRICs ETF (BBRC) crossed above ...

PFI Crosses Above Key Moving Average Level
Tue, Oct 21, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares DWA Financial Momentum Portfolio ETF (PFI) crossed ...

Related videos | all videos »
  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

For ETF Investors, Currency Exposure Matters (More Than You Might Think) | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.