remain an underappreciated corner of the fund world. While there
are about three dozen products currently on the market in this
space, combined, they only possess less than $5 billion in
However, investors should note that most of the funds in this
space are single currency, passively managed funds. That means
that they are probably more appropriate for those looking to
hedge out exposure to a single currency, or those who are looking
to make a specific bet on the dollar against one medium of
Still, there has also been a bit of a push to more active
basket products which hold a variety of currencies, and seek to
provide investors with uncorrelated returns. This type of
exposure is well-suited for active management for those who are
able to read the forex markets and move investors into and out of
the right currencies at the correct times (read
Bet Against the Dollar with These Three Currency
In this vein, PIMCO has recently pushed out a currency ETF of
its own, the first from the traditional bond giant, in order to
capture assets in this interesting but often overlooked space.
The new fund, the
Foreign Currency Strategy ETF (
, looks to provide global exposure to foreign currencies, and
truly shake up the current offering lineup in the space.
FORX Currency ETF in Focus
The new fund looks to go long in a variety of foreign
currencies and is likely to appreciate if the American dollar
goes down. In order to accomplish this task, FORX will invest in
not only currencies, but forwards and fixed income securities
denominated in foreign nations as well.
The ETF looks to limit holdings in any single currency to 20%
of the portfolio, and to have a low duration between zero and
three years. At time of writing, this level of duration came in
at roughly half a year, while the total cost, after fee waivers,
is 65 basis points a year.
In terms of holdings, the fund currently possesses over 30,
with a heavy focus on North America and the broader European
regions. Norway and Canada take the top spots at just under 15%,
while Russia and Mexico round out the top four (read
Is It Time to Buy The Hedged Currency ETFs?
This suggests that the product has a nice mix between
developed and emerging currencies, giving the fund a balanced
approach from a risk perspective. However, most of the top
holdings are what is known as 'commodity currencies' so they
could be heavily dependent on natural resource prices going
How does it fit in a portfolio?
This product could be an interesting choice for investors
seeking a new currency play, or a way to broadly hedge out some
dollar risk. The fund could also be a good pick for investors who
believe in active management and that a portfolio manager can add
value in this asset class.
Just note that this active management will result in a bit of
extra costs so it may not be the best choice for those seeking a
rock-bottom expense ratio. Currency products are also not known
for their big moves, so FORX is unlikely to be a big winner (or
loser) compared to many funds in a portfolio.
Can It Succeed?
The fund doesn't exactly have a huge number of competitors,
but there are few other options for investors in the basket
currency space. First is the
WisdomTree Commodity Currency Fund (
, a product that zeroes in on 'commodity currencies'.
This gives it an exposure profile similar to-at least the
current top holdings-of FORX while doing so at a lower cost of 55
basis points a year. However, the fund doesn't exactly have a
huge following, and its limit to commodity currencies could hurt
the fund if natural resource prices fall (see
The Key to International ETF Investing
Beyond that fund, there is the relatively popular
Emerging Currency Fund (
. This ETF has an impressive $300 million in assets and also
charges a 55 basis point expense ratio for its exposure.
This product, as you might be able to guess by the name, is
focused on emerging currencies, so nations like Canada or Norway
will not be represented in this product. While this could help to
juice returns, it could also increase volatility over what
investors see in a more mixed product.
The real test will be if FORX can provide a nice level of
outperformance and if its currency choices end up being the
correct calls. If that ends up happening, there is no reason why
this product can't develop a decent asset base, although it may
take some time in the often-overlooked currency ETF market.
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