Currency trading sometimes gets a bad reputation, sounding a bit like a risky speculator strategy. But there’s a strong case to be made for adding currency to your portfolio; after all, currency doesn’t really follow the market ups and downs. Currencies have their own pressures that drive their direction—interest rates, global economic conditions, political instability and even natural disasters—which are mostly independent from Wall Street. (See also: The Basics of Currency Trading.)
Most professional traders approach currency investing in one of two ways, choosing either a momentum or value strategy driven by technical analysis—a lot of work for anyone but the most dedicated investor. (See also: Top 7 Technical Analysis Tools.)
Fortunately, there are a few high-performing currency ETFs that take the guess work out of trades while still letting you diversify your portfolio with exposure to the very volatile currency market. Here’s a look at three of the best.
Note: All year-to-date performance figures are based on the period between January 1, 2016 and November 30, 2016, unless otherwise noted. Funds were chosen by both performance and assets under management.
PowerShares DB US Dollar Index Bullish Fund (UUP)
Assets Under Management: $853 million
YTD Performance: 2.38%
Expense Ratio: 0.80%
This is the largest currency ETF and it tracks the Deutsche Bank Long US Dollar Index (USDX) Futures Index - Excess Return. This index tracks the value of the US dollar to a basket of six major currencies including the euro, the Swiss franc, the Swedish krona, the Canadian dollar, the Japanese yen and the British pound.
Currently, the portfolio is heavily weighted toward the euro (roughly 57%) followed by the yen and the pound at 13% and 12% respectively.
Since its inception in February 2007, the fund has achieved total returns of 0.63%, with one-year, three-year and five-year returns of 0.69%, 6.54% and 3.52%.
PowerShares DB G10 Currency Harvest Fund (DBV)
Assets Under Management: $50.2 million
YTD Performance: 9.10%
Expense Ratio: 0.80%
This is a 2:1 leveraged ETF which seeks to track the returns of the DB G10 Currency Future Harvest Index ER, which is comprised of futures contracts on various G10 currencies. The fund takes long futures positions in currencies with higher interest rates and short currency positions on those with lower interest. As a leveraged fund, it’s more risky than other currency funds, but the returns have significantly outperformed the US dollar index.
The fund is rebalanced and reconstituted on a quarterly basis; the current portfolio is made up of the Norwegian krone, the New Zealand dollar, the Swiss franc, the Australian dollar, the euro and the Swedish krona.
Since its inception in 2006, the fund has achieved total returns of 0.59%, with one-year, three-year and five-year yields of 7.44%, -0.03% and 1.27% respectively.
WisdomTree Bloomberg US Dollar Bullish ETF (USDU)
Assets Under Management: $206.70 million
YTD Performance (January 1 through December 31, 2016): 2.57%
Expense Ratio: 0.50%
This is a relatively new entry in the currency ETF niche with an inception date of December 2013. The fund is less expensive than similar currency ETFs and seeks to capitalize on an appreciating dollar in relation to broader basket of foreign currencies than the ICE US Dollar Index (DXY).
USDU tracks the Bloomberg Dollar Spot Index (BBDXY) which measures the dollar against both its largest trading partners and the most frequently traded global currencies, which gives the fund exposure to emerging market currencies such as the Korean won and Mexican peso. It is far less heavily tilted toward the Eurozone, with just 31% of its holdings in euro compared to 57% for the DXY.
Since its inception, the fund has delivered cumulative returns of 16.97%. (See also: 4 EFTs to Profit from the Strong Dollar.)