Major ETFs tied to the GBP have taken a tumble on the heels of the UK's 'leave' vote today.
Currency ETFs, also known as forex ETFs, are designed to reflect the value or performance of a given currency, such as the U.S. dollar or the British pound (GBP). Currency ETFs trade like stocks on regular exchanges, such as the NYSE ARCA, just as other ETFs do.
There are two common structures, or approaches, used with currency ETFs. Some represent the performance of a given currency pair, tracking the exchange rate between two specific currencies. Others are single-currency ETFs, which reflect the overall performance of a selected currency against a number of other major currencies, such as the euro, the Japanese yen or the Swiss franc.
The Currency Shares British Pound Sterling Trust ETF
The Currency Shares British Pound Sterling Trust ETF (NYSEArca: FXB) is designed to provide a simple means for investors to obtain exposure to the profit potential in the value of the British pound sterling as measured against the U.S. dollar. The trust issues shares that represent units of fractional interest in the GBP/USD exchange rate that shows the U.S. dollar price of the British pound sterling. The value of the shares increases in correlation to increases in the GBP/USD exchange rate.
This ETF, issued by Rydex/SGI, is rated as relatively moderate risk. Currently, as of June 24, 2016, it is trading the lowest since inception, after the Brexit vote. The fund's expense ratio is a relatively low 0.4%. Since this is not an equity-based ETF, there is no dividend yield. This fund is, by far, the largest ETF focused on the British pound, with over $55 million in assets.
The iPath GBP/USD Exchange Rate ETN
The iPath GBP/USD Exchange Rate fund (NYSEArca: GBB) is an exchange-traded note (ETN). ETNs are considered part of the ETF asset class. However, they differ from regular ETFs in that they are debt securities, so they are subject to the credit risk associated with the issuer – in this case, Barclays Bank. The benchmark index that the fund tracks is the foreign exchange spot rate between the British pound and the U.S. dollar. When the pound increases in value relative to the U.S. dollar, the ETN's share value likewise increases. The underlying index also reflects the returns realized through holding cash collateral of the investments in GBP/USD in the form of U.S. Treasury bills.
GBB is rated as relatively high risk. There is significantly less liquidity in this investment as compared to FXB; GBB's assets total only just over $0.77M, and its average daily trading volume is just 11,500 shares. The expense ratio for this ETN is the same as that for FXB, 0.4%. This ETF has been suffering for the last year or so. As of the day of the Brexit vote, the ytd return for the GBB was at -30%.
The PowerShares U.S. Dollar Bearish Fund ETF
The PowerShares U.S. Dollar Bearish Fund ETF (NYSEArca: UDN) is not exclusively focused on the British pound, but it significantly includes the pound in a basket of major currencies measured against the U.S. dollar. This medium-risk ETF from Invesco/PowerShares tracks the Deutsche Bank Short U.S. Dollar Index Futures Index, which reflects the performance of short U.S. dollar positions against the euro, the pound, the Japanese yen, the Swiss Franc, the Canadian dollar and the Swedish krona. While the euro accounts for roughly half of the index, the GBP/USD exchange rate is the next-largest component, accounting for nearly 20% of the index.
UDN's expense ratio is 0.8%. This fund is appropriate for investors who desire significant exposure to potential profits in holding the pound along other major currencies against the value of the U.S. dollar. Shares dropped some 2% today.
