Currency traded funds (ETFs) allow retail investors to participate in the foreign exchange market. Market participants can buy or sell a currency fund similar to an equity ETF.
According to the 2019 Triennial Report of the Bank for International Settlements:
“Trade in the currency markets reached $ 6.6 trillion a day in April 2019, up from $ 5.1 trillion three years earlier … The US dollar has maintained its dominant status, finding itself from a portion of 88% of all transactions. In April 2019, sales offices in five countries – the United Kingdom, the United States, Hong Kong, Singapore and Japan – facilitated 79% of all transactions.
Today we bring you two Forex ETFs that may appeal to a wide range of readers.
1. US bullish fund Invesco DB
- Current price: $ 24.78
- 52-week range: $ 24.09 – 25.60
- Expense ratio: 0.76% per year
This ETF is for US dollar bulls. Over the past year, US dollar index futures have remained flat. The Federal Reserve introduced the USDX in 1973 with an initial value of 100.
It measures the value of the US dollar against a basket of six currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc. The index rises as the greenback strengthens against these currencies, especially the euro.
Institutional investors in currencies, bonds and commodities (inclusive) as well as equities are watching the USDX closely. A rise in the US dollar is generally considered bearish for commodities.
Conversely, a weaker dollar is generally viewed as more conducive to emerging market assets. Global political crises usually mean strength for the greenback. However, these relationships are generalizations that don’t always follow a blueprint.
The Invesco DB US Dollar Index Bullish Fund (NYSE 🙂 is exposed to US dollar index futures traded on the US exchange ICE Futures. This fund was launched in February 2007 and manages approximately $ 467 million. Investors who are bullish on the US dollar buy this fund.
Since the beginning of the year, UUP has increased by about 2.4%. However, like the USDX, it has fallen by around 0.4% in the past 52 weeks. UUP hit a 52-week high of $ 25.60 over 11 months ago on September 25, 2020.
Its 52-week low ($ 24.09) was reached on June 1, 2021. Since then, backers of the greenback have had the upper hand until mid-August. But uncertainty over whether and when the Fed might scale back asset purchases has put pressure on the US dollar.
It is understandable that if the Fed were to reduce its debt purchases, there would be less liquidity in the financial system. Therefore, the dollar’s value would likely rise. On the other hand, accommodative Fed policy generally provides little support for the greenback.
Investors expecting an end to the Fed’s dovish stance and a rise in the US dollar in the coming weeks might consider buying the UUP.
2. Invesco CurrencyShares Trust in Japanese Yen
- Current price: $ 85.53
- 52 week range: $ 84.31 – $ 92.01.
- Expense ratio: 0.40% p.a ..
This ETF focuses on the yen, or JPY, the national currency of Japan, whose economy is the third largest in the world. The yen is also the most traded currency in Asia.
Many market participants see the yen as a safe haven, especially to protect themselves from falling global stock prices. In other words, when there is risk aversion in the world, the yen generally strengthens. Hence, investors who want to keep their long equity portfolios can consider buying the yen as a potential hedge.
The Invesco CurrencyShares® Japanese Yen Trust (NYSE 🙂 tracks Japanese yen returns. This fund began operating in 2007. Its net worth is $ 200.1 million.
So far in 2021, FXY has fallen by 6.5%. The ETF hit a 52-week high in January and a 52-week low in July. The strength of the global dollar at the beginning of the year pushed the FXY lower. Should the USD appreciate further, FXY could test the July lows again and drop further.
Investors who believe FXY may decline in the coming weeks could buy a put option or initiate a bearish put spread. More experienced traders might also consider short-term trading on the ProShares UltraShort Yen (NYSE :), a leveraged inverse ETF, which seeks daily investment results that are twice (i.e. -2x) the daily price performance of the JPY compared to the greenback.