A Forex ETF to diversify or hedge against the volatility of US stocks

Investors seeking exposure to the foreign exchange (forex) market are increasingly turning to currency traded funds (CETFs). As normal brokerage accounts can access these CETFs, retail investors do not need to trade derivatives such as swaps, futures, futures or options.

The Bank for International Settlements (BIS) reports that the daily trading volume in the global currency markets exceeds $ 6 trillion. Over 90% of these transactions take place between institutions. In other words, retail clients contribute less than 10% of the total volume in the forex markets.

We recently covered two non-US equity ETFs that appeal to investors looking to geographically diversify their portfolios in light of the recent weakness on Wall Street. Likewise, currency ETFs are valuable tools for portfolio diversification, hedging and even speculation.

However, currency funds currently represent only a small portion of the ETF universe, with fewer than two dozen US-listed currency funds. With this information, here is one that deserves the attention of readers.

Invesco CurrencyShares confidence in Japanese yen

  • Current price: $ 81.85
  • 52-week range: $ 80.67 – $ 91.13
  • Tariff: 0.40% per annum

Our first fund, the Invesco CurrencyShares® Japanese Yen Trust (NYSE :), tracks the price of the. This CETF is suitable for yen supporters. The fund was launched in 2007 and currently has net assets of $ 197.6 million.


The exchange rate between the dollar and the yen reflects the number of yen per 1 US dollar. At the time of writing, the USD / JPY parity is around 114.17.

Anyone who follows the currency markets knows that the yen is widely traded globally. The Japanese currency is seen primarily as a safe haven and used primarily to hedge against a potential drop in global stock prices.

A strong yen generally implies worldwide risk aversion. Therefore, investors expecting a weakness in the global economy could use FXY to hedge their equity holdings.

Over the past 12 months, FXY has fallen by 10.1%. The ETF hit its multi-year high in January 2021 and its 52-week low in early 2022.

A strong dollar in the second half of 2021 and the expected rise in US interest rates pushed FXY lower (or USD / JPY higher).

Yet, since the start of the new year, FXY has returned to around 2.5%. Meanwhile, broader US indices have come under pressure. For example, the index lost around 8.8% in January.

Many forex traders would argue that the yen’s movements mainly depend on what happens in the US and not necessarily Japan. The next few months could see a battle between yen bulls and yen bears. On one side of the equation are those who expect the yen to appreciate further, especially if global equity volatility continues.

These yen bulls might consider buying the FXY around current levels. We also believe the yen could strengthen further given the uncertainties surrounding global growth and the central bank’s short-term policy actions.

Short-term yen backers might also consider a leveraged CETF, such as the ProShares Ultra Yen (NYSE :). This fund aims to multiply the daily price performance of the yen against the US dollar by two (2x). But as we regularly discuss, leveraged or inverse funds are not suitable for most long-term retail traders.

Meanwhile, other investors may expect the FXY to continue to slide as the bullish Fed raises rates. Such a move could give the US dollar a boost.

In this case, these yen bearers could use a leveraged and inverse ETF, namely the ProShares UltraShort Yen (NYSE :). As the name suggests, this CETF seeks daily returns equal to twice (-2x) the performance of the yen versus the greenback. But we must once again note that those who hold CETFs with leverage for more than one day may be exposed to substantial risks.

It is impossible to know how USD / JPY could move in the coming weeks. However, we can expect the current wild swings in equities to result in potential large moves in the yen versus the dollar as well.

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