A Comparison of Exchange-Traded Foreign Currency Products

These new ETFs have been trading long enough to see how they are faring in the market. I have prepared a table which shows the facts. I can’t figure out how to insert the table directly into the blog, but you can view it by clicking the link below.

At this time, only FXE and DBV have enough trading volume to be really liquid. FXF could be traded with careful use of limit orders. The rest are languishing. All of these ETFs except DBV are the synthetic equivalent of owning the currency in a foreign money market account. For example, one share of FXE is equivalent to a deposit of 100 Euros.

DBV is different from the others. It is a synthetic carry trade. They buy the three highest-yielding currencies and sell short the three lowest-yielding. While this strategy can be an effective means of generating profits, I am not at all sure that DBV’s price movements will show a negative correlation to the U.S. Dollar; in fact, there may be a positive correlation.

FXE is clearly the best choice for a low cost, exchange-traded hedge against a weakening dollar.



3 Responses to “A Comparison of Exchange-Traded Foreign Currency Products”

  1. More on Exchange-Traded Foreign Currency Products « Alligator Investor Says:

    […] I was flattered that Random Roger posted a commentary on my previous post which compared exchange-traded foreign currency products. Roger is a financial advisor who has great insight into the workings of the financial markets and he is willing to share his thinking with self-directed investors. Random Roger is one of the few blogs I read every day. I greatly respect and admire his work and I particularly value his views on diversification. […]

  2. PowerShares DB G10 Currency Harvest Fund ETF (DBV) « Alligator Investor Says:

    […] DBV was mentioned in October in a post comparing exchange-traded foreign currency products. In that post it was noted that DBV differs from the other foreign currency ETFs in that it is a synthetic carry trade instead of a synthetic long. The fund buys the three highest-yielding G-10 currencies and sells short the three lowest-yielding. The carry trade can be lucrative, and this ETF enables small investors to participate in the strategy by simply purchasing shares. The carry trade is the basis of many fortunes and back-testing of DBV’s underlying index does look promising. The index has generated returns beating the S&P but with a low .21 correlation to the S&P. One negative feature, though, is that DBV generates no cash flow and it will not pay a dividend. This does not necessarily rule it out as an investment, but in my book DBV does start out with one strike against it. […]

  3. currency comparison Says:

    It’s a nice informative blog for online currency comparison services. It is helpful for money transfer and currency exchange.

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