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

KBE Makes Bullish Cross Above Critical Moving Average
Thu, Oct 30, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P Bank ETF (KBE) crossed above their ...

EEB Makes Bullish Cross Above Critical Moving Average
Thu, Oct 30, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Guggenheim BRIC ETF (EEB) crossed above their 200 ...

Bank and Brokerage (RKH) Shares Cross Above 200 DMA
Thu, Oct 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the Bank and Brokerage ETF (RKH) crossed above their ...

Shares of SRS Now Oversold
Thu, Oct 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the Proshares UltraShort Real Estate ETF (SRS) entered into ...

SLVP Crosses Critical Technical Indicator
Thu, Oct 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI Global Silver Miners ETF (SLVP) entered ...

IEMG Makes Bullish Cross Above Critical Moving Average
Thu, Oct 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares Core MSCI Emerging Markets ETF (IEMG) crossed ...

GDXJ Crowded With Sellers
Thu, Oct 30, 11:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Junior Gold Miners ETF (GDXJ) entered into oversold ...

GDX Crosses Critical Technical Indicator
Thu, Oct 30, 11:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Gold Miners ETF (GDX) entered into oversold territory, ...

EPU Crosses Critical Technical Indicator
Thu, Oct 30, 11:54 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI All Peru Capped ETF (EPU) entered ...

ETFS Physical Silver Shares (SIVR) Enters Oversold Territory
Thu, Oct 30, 11:54 AM ET, by ETF Channel

In trading on Thursday, shares of the ETFS Physical Silver Shares ETF (SIVR) entered into ...

VXF, TWTR, AAL, TSLA: ETF Inflow Alert
Thu, Oct 30, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: VXF, TWTR, AAL, TSLA Exchange traded funds (ETFs) trade just ...

Consumer Discretionary Select Sector SPDR Fund Experiences Big Inflow
Thu, Oct 30, 11:34 AM ET, by ETF Channel

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

IWO, PBYI, TMH, ISIS: ETF Inflow Alert
Thu, Oct 30, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: IWO, PBYI, TMH, ISIS Exchange traded funds (ETFs) trade just ...

Energy Select Sector SPDR Fund Experiences Big Outflow
Thu, Oct 30, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: XLE, CVX, EOG, OXY Exchange traded funds (ETFs) trade just ...

IVV, AAPL, XOM, MSFT: ETF Inflow Alert
Thu, Oct 30, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: IVV, AAPL, XOM, MSFT Exchange traded funds (ETFs) trade just ...

IVW, JNJ, SLB, GOOGL: ETF Inflow Alert
Thu, Oct 30, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: IVW, JNJ, SLB, GOOGL Exchange traded funds (ETFs) trade just ...

SHY: Large Outflows Detected at ETF
Thu, Oct 30, 11:34 AM ET, by ETF Channel

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

Shares of DBP Now Oversold
Thu, Oct 30, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the PowerShares DB Precious Metals Fund ETF (DBP) entered ...

Gold Explorers Getting Very Oversold
Thu, Oct 30, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the Gold Explorers ETF (GLDX) entered into oversold territory, ...

BKF Makes Bullish Cross Above Critical Moving Average
Thu, Oct 30, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI BRIC ETF (BKF) crossed above their ...

SPDR S&P Telecom (XTL) Shares Cross Above 200 DMA
Thu, Oct 30, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P Telecom ETF (XTL) crossed above their ...

16.8% of XOP Holdings Seeing Recent Insider Buys
Thu, Oct 30, 10:14 AM ET, by ETF Channel

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

PX Named Top 25 SAFE Dividend Stock Increasing Payments For Decades
Thu, Oct 30, 9:24 AM ET, by ETF Channel

Praxair, Inc. (PX) has been named to the Dividend Channel ''S.A.F.E. ...

iShares Emerging Markets Infrastructure (EMIF) Shares Cross Above 200 DMA
Wed, Oct 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares Emerging Markets Infrastructure ETF (EMIF) crossed above ...

CSJ Makes Notable Cross Below Critical Moving Average
Wed, Oct 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares 1-3 Year Credit Bond ETF (CSJ) crossed ...

AIA Crosses Above Key Moving Average Level
Wed, Oct 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares Asia 50 ETF (AIA) crossed above their ...

Daily Junior Gold Miners Index Bull 3x Shares (JNUG) Enters Oversold Territory
Wed, Oct 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Daily Junior Gold Miners Index Bull 3x Shares ...

RING Crowded With Sellers
Wed, Oct 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Global Gold Miners ETF (RING) entered ...

SPDR S&P Regional Banking (KRE) Shares Cross Above 200 DMA
Wed, Oct 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&P Regional Banking ETF (KRE) crossed above ...

PRFZ Crosses Above Key Moving Average Level
Wed, Oct 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio ETF ...

EMHY Crosses Above Key Moving Average Level
Wed, Oct 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares Emerging Markets High Yield Bond ETF (EMHY) ...

PSCI Crosses Above Key Moving Average Level
Wed, Oct 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares S&P SmallCap Industrials Portfolio ETF (PSCI) crossed ...

EGShares Emerging Markets Consumer (ECON) Shares Cross Above 200 DMA
Wed, Oct 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the EGShares Emerging Markets Consumer ETF (ECON) crossed above ...

PowerShares KBW Regional Bank Portfolio Breaks Above 200-Day Moving Average - Bullish for KBWR
Wed, Oct 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares KBW Regional Bank Portfolio ETF (KBWR) crossed ...

EWQ: ETF Inflow Alert
Wed, Oct 29, 10:54 AM ET, by ETF Channel

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

EDZ: Large Outflows Detected at ETF
Wed, Oct 29, 10:54 AM ET, by ETF Channel

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

FONE Makes Bullish Cross Above Critical Moving Average
Tue, Oct 28, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the First Trust NASDAQ CEA Smartphone Index Fund ETF ...

Vanguard FTSE Emerging Markets (VWO) Shares Cross Above 200 DMA
Tue, Oct 28, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Vanguard FTSE Emerging Markets ETF (VWO) crossed above ...

QABA Crosses Above Key Moving Average Level
Tue, Oct 28, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the First Trust NASDAQ ABA Community Bank Index Fund ...

PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD) Shares Cross Above 200 DMA
Tue, Oct 28, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares S&P SmallCap Consumer Discretionary Portfolio ETF (PSCD) ...

IWM Makes Bullish Cross Above Critical Moving Average
Tue, Oct 28, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the iShares Russell 2000 ETF (IWM) crossed above their ...

JKJ Crosses Above Key Moving Average Level
Tue, Oct 28, 3:54 PM ET, by ETF Channel

In trading on Tuesday, shares of the iShares Morningstar Small-Cap ETF (JKJ) crossed above their ...

AOA Makes Bullish Cross Above Critical Moving Average
Tue, Oct 28, 3:54 PM ET, by ETF Channel

In trading on Tuesday, shares of the iShares Aggressive Allocation ETF (AOA) crossed above their ...

Danaher Takes Over #49 Spot From PerkinElmer
Tue, Oct 28, 11:54 AM ET, by ETF Channel

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

Daily Mid Cap Bull 3x Shares Breaks Above 200-Day Moving Average - Bullish for MIDU
Tue, Oct 28, 11:24 AM ET, by ETF Channel

In trading on Tuesday, shares of the Daily Mid Cap Bull 3x Shares ETF (MIDU) ...

HDG Crosses Above Key Moving Average Level
Tue, Oct 28, 11:24 AM ET, by ETF Channel

In trading on Tuesday, shares of the Proshares Hedge Replication ETF (HDG) crossed above their ...

AOK Makes Bullish Cross Above Critical Moving Average
Tue, Oct 28, 11:24 AM ET, by ETF Channel

In trading on Tuesday, shares of the iShares Conservative Allocation ETF (AOK) crossed above their ...

SPDR S&P Aerospace & Defense Breaks Above 200-Day Moving Average - Bullish for XAR
Tue, Oct 28, 11:24 AM ET, by ETF Channel

In trading on Tuesday, shares of the SPDR S&P Aerospace & Defense ETF (XAR) crossed ...

BLDRS Asia 50 ADR Index Fund Breaks Above 200-Day Moving Average - Bullish for ADRA
Tue, Oct 28, 11:24 AM ET, by ETF Channel

In trading on Tuesday, shares of the BLDRS Asia 50 ADR Index Fund ETF (ADRA) ...

VGK, GSK, BTI, RDS.B: Large Outflows Detected at ETF
Tue, Oct 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VGK, GSK, BTI, RDS.B Exchange traded funds (ETFs) trade just ...

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.