I do recognize that currency
might not have experienced the massive growth that, say,
fixed-income ETFs have in the past few years. After all, it's not
every day that you get a blockbuster like the PIMCO Total Return
Bond Fund ETF (NYSEArca:BOND).
But, with QE-infinity underway, and central banks actively
engaged in the devaluation of their currencies-I would argue that
currency ETFs are more important now than ever.
For one, the $3.8 billion in assets that Paul quoted for
currency ETFs conveniently excludes the heavily traded and utilized
leverage and inverse currency ETFs. When you include those funds,
the currency ETF space is really around $4.5 billion.
Granted, that's nothing compared to the assets in fixed-income
or equity ETFs, but it's hardly irrelevant, Paul.
The fact is-the incorporation of currencies into a diversified
portfolio is still fairly new to many investors. For the
longest time, the forex markets have been dominated by large
institutions, banks, and traders aiming to hedge their exposure or
However, with the growth of ETFs in the international equity and
fixed-income space, investors are more exposed now than ever to
foreign currency fluctuations. This fact doesn't make currencies
moot-it makes it a reason to understand and manage exposure.
Take a look at the chart below-it's the year-to-date performance
of the MSCI Brazil Index in dollars and in the local Brazilian
currency, the real. The dollar version of the index takes into
account the exchange of Brazilian reais into U.S. dollar.
As a result, whenever the real depreciates, U.S. investors
suffer; and whenever the real appreciates, U.S. investors get a
In the past year, local investors in Brazil returned a bit more
than 11 percent, while U.S. investors in Brazil were actually
slightly in the red, with the difference centering entirely on the
dollar having the upper hand in the currency cross.
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