This interesting new ETF seeks to simulate the currency carry trade, and should offer less risk than investing in a single currency.
The PowerShares DB G10 Currency Harvest Fund (DBV) “Seeks to track the Deutsche Bank G10 Currency Future Harvest Index by (1) entering into long futures contracts on the three G10 currencies associated with the highest interest rates, (2) entering into short futures contracts on the three G10 currencies associated with the lowest interest rates, and (3) collateralizing the futures contracts with United States 3-month Treasury bills.” Data and a chart show that this strategy would have performed quite well historically, with a ten year average return of 11.48% vs. 8.32% for the S&P, and with less volatility. The currencies in question here are Euros, Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone, and Swedish Krona. The fund will not invest in the US Dollar since it is the fund’s base currency.”
Potential Advantages of Investing in the Fund
* Enhanced Currency Index: The Index is designed to exploit the tendency for currencies associated with higher interest rates to yield greater returns than currencies associated with lower interest rates. Although past performance should not be taken as an indication of future performance, the Index generally has produced positive historical results when compared to investing in a single currency.
* Diversification: Currencies may help to diversify a portfolio because currency returns have tended to exhibit low correlation to stock and bond returns.
* Ease of Investment: The Fund provides convenient access to the returns of the international currency markets by following a highly-developed index previously available only to very sophisticated investors
* Low Volatility: Although past performance is no guarantee of future performance, the Index has historically been less volatile than an investment in the S&P 500.”
Morningstar notes: “The index is leveraged 2-to-1 on the long side; currencies with the highest or lowest rates are reviewed and rebalanced quarterly. Short-term Treasury bills provide collateral for the futures. This fixed- income portion of the portfolio generates yield, which is used to offset the ETF’s fees. (Note: the expense ratio is rather high, .81.) Therefore, investors get a return from both the Treasury yield and the movement in the currency futures. However, capital gains from “rolling” the futures contracts are taxed at a higher rate than stocks — 40% of the gains are considered short-term and 60% are long-term gains.” Therefore, DBV might be better suited to tax-sheltered investment accounts.”
Despite the short trading reccord of DBV and the lack of sophisticated historical charts for the underlying index, I am inclined to trust Deutsche Bank and the SEC. Volume already averages 100K a day, so the fund has gained acceptance by the trading community. I am convinced that DBV is a better way for me to hedge against US dollar risk than investing in a single-currency ETF such as FXA, because of the diversification, the hedged nature of the carry trade it simulates, and the lower volatility. But the investment returns of this fund will not be tax-friendly, so I will plan to invest through my IRA, and to accumulate shares by means of dollar cost averaging.