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3 Currency ETFs that Crumbled in Q1 - ETF News And Commentary

The diverging policies in the U.S. and the other countries have escalated the global currency war this year, pushing the U.S. dollar to multi-year highs against a basket of currencies (see: all currency ETFs here ).

This is especially true, as a number of countries across the world have chosen loose monetary policies by cutting interest rates or other actions to stimulate sagging growth and prevent deflationary pressures in their economies. This is in stark contrast to the U.S. Fed policy of tightening its stimulus program by wrapping up QE3 and aiming an interest rate hike sometime later in the year.

Additionally, improving U.S. economic activities and the strengthening job market have raised speculations over a faster-than-expected interest rates hike for most of the first quarter that had pulled capital out from the emerging market stocks to the American stocks, leading to a sharp decline in developing nation currencies. Global growth concerns and geopolitical tensions have further contributed to the strength in the greenback.

However, oil price has rebounded slightly from its six-year low, giving some respite to the currencies of oil exporting nations, which were leading the decline last year. In fact, 2014's worst performing currency - Russian ruble - has made a strong comeback this year and became the best performing currency of Q1 (read: Best and Worst Performing Currency ETFs of 2014 ).

Given this, we have highlighted three currency ETFs that suffered the most due to the sluggish trend in Q1 and could see continued loss in the months ahead if the U.S. dollar keeps surging. In particular, the Brazilian real stole the show, plunging 21.1% in Q1, and touched a 12-year low against the U.S. dollar followed by a double-digit decline in euro and Swedish krona.

WisdomTree Brazilian Real Strategy Fund ( BZF ) - Down 14%

Fears over the political crisis and the possible loss of investment-grade credit rating for the country continued to weigh heavily on the Brazilian real, making it the worst performing currency so far this year. The weakening economy, rising inflation, scandal at the Brazilian state-run energy giant Petroleo Brasileiro ( PBR ) and scaling back of the swap auction added to the woes of the currency.

As a result, BZF lost about 14% in the first quarter. This fund seeks to achieve total returns reflective of both money market rates in Brazil available to foreign investors and changes in value of the Brazilian real relative to the U.S. dollar. It has amassed $17.6 million in its asset base while trades in light volume of under 21,000 shares per day on average. The product has an expense ratio of 0.45% and a Zacks ETF Rank of 5 or 'Strong Sell' rating with a High risk outlook.

iPath EUR/USD Exchange Rate ETN ( ERO ) - Down 11.1%

The euro has been weakening against the greenback over the past several months on Eurozone stimulus, U.S. rate hike speculation and Greek debt concerns. In fact, the currency tumbled to a 12-year low in early March after the European Central Bank (ECB) began its bond-buying program as part of its plan to purchase €60 billion bonds per month through September 2016. The collapse in the euro has raised the likelihood of it being equivalent to the dollar at some point later this year or in the next (read: Bet on Euro-Dollar Parity with These ETFs ).

Given this, ERO, which seeks to match the performance and yield of the EUR/USD exchange rate, was down over 11% in Q1. The note has failed to attract investors with just $2.5 million in AUM and less than 1,000 shares in average daily volume. This suggests that investors have to pay an additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.40%. The product has a Zacks ETF Rank of 4 or 'Sell' rating with a High risk outlook.

CurrencyShares Swedish Krona Trust ETF ( FXS ) - Down 9.4%

The Swedish Krona was already struggling in the wake of record low interest rates and deflationary pressure. The Swedish central bank's unexpected cut in key interest rates further to a negative territory and launch of bond buying program worth 10 billion Swedish kronor ($1.2 billion) pushed the currency down to the lower levels against the U.S. dollar (read: Sweden ETF in Focus After Rate Cut ).

This has resulted in a loss of 9.4% in value for FXS, which tracks the movement of the Swedish Krona relative to the USD. The product has been able to manage $22.9 million in its asset base while trades in light volume of under 2,000 shares per day on average. Expense ratio came in at 0.40%. FXS has a Zacks ETF Rank of 2 or 'Buy' rating with a High risk outlook.

Bottom Line

Trading in currencies has been rough over the past several months due to a strengthening dollar, improving U.S. economy, global growth worries and diverging policies. As such, investors need to be cautious before investing in this corner of the investing world.

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WISDMTR-BRZ RL (BZF): ETF Research Reports

IPATH-EUR/US EX (ERO): ETF Research Reports

CRYSHS-SWED KRN (FXS): ETF Research Reports

PETROBRAS-ADR C (PBR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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