Currency exchange-traded funds (ETFs) enable 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 Bank for International Settlements triennial report of 2019:
"Trading in FX markets reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier.... The US dollar retained its dominant currency status, being on one side of 88% of all trades. In April 2019, sales desks in five countries—the United Kingdom, the United States, Hong Kong, Singapore and Japan—facilitated 79% of all foreign exchange trading."
Today we introduce two currency ETFs that could appeal to a range of readers.
1. Invesco DB US Dollar Index Bullish Fund
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, the US Dollar Index futures has been flat. The Federal Reserve introduced the USDX in 1973 with an initial value of 100.
It measures the value of the US dollar relative to a basket of six currencies—the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The index rises when the greenback strengthens against these currencies, especially the euro.
Institutional investors in currency, bonds and commodities (especially gold) as well as equities watch the USDX closely. A rising US dollar is typically regarded as bearish for commodities.
On the other hand, a weaker USD is generally considered more favorable for emerging market assets. Political crises on a global scale usually mean strength for the greenback. However, these relationships are generalizations that do not always follow a textbook pattern.
The Invesco DB US Dollar Index Bullish Fund (NYSE:UUP) has exposure to the US Dollar Index futures contracts that trade on the ICE Futures US exchange. The fund was launched in February 2007 and has about $467 million under management. Investors who are bullish on the US dollar would buy the fund.
Year-to-date, UUP is up about 2.4%. However, like the USDX, it is down about 0.4% in the past 52 weeks. UUP saw a 52-week high of $25.60 more than 11 months ago, on Sept. 25, 2020.
Meanwhile, the 52-week low of $24.09 came on June 1, 2021. Since then greenback bulls have had the upper hand until mid-August. But the uncertainty over if and when the Fed could taper its asset purchases has put pressures on the US dollar.
Understandably, if the Fed were to reduce debt purchases, there will be less cash in the financial system. As a result, the value of the dollar would likely go up. On the other hand, an accommodative Fed policy typically provides little support for the greenback.
Investors who expect the dovish stance of the Fed to end and the US dollar to go up in the coming weeks might consider buying UUP.
2. Invesco CurrencyShares Japanese Yen Trust
Current Price: $85.53
52-Week Range: $84.31 - $92.01
Expense Ratio: 0.40% per year
This ETF focuses on the yen, or JPY, the national currency of Japan, which has the world’s third-largest economy. The yen is also the most traded currency in Asia.
A large number of market participants see JPY as a safe haven, especially to hedge against a decline in prices of global equities. Put another way, whenever there is risk aversion worldwide, the yen typically strengthens. Thus, investors who want to keep their long equity portfolios might consider buying the yen as a potential hedge.
The Invesco CurrencyShares® Japanese Yen Trust (NYSE:FXY) tracks the returns of the Japanese yen. The fund began trading in 2007. Its net assets stand at $200.1 million.
So far in 2021, FXY is down 6.5%. The ETF hit a 52-week high in January and a 52-week low in July. The global USD strength earlier in the year has pushed FXY down. If the USD were to appreciate more, FXY could retest the July lows, and slide even further.
Investors who believe FXY could decline in the coming weeks might buy a put or initiate a bear put spread. More experienced traders could also consider short-term trades in ProShares UltraShort Yen (NYSE:YCS), an inverse and leveraged ETF, which seeks to achieve daily investment results that correspond to twice the inverse (i.e., -2x) of the daily performance of the price of JPY versus the greenback.