Exchange-traded funds (ETFs) have become increasingly popular with investors. Currency ETFs, also referred to as forex ETFs, are funds that represent the value and performance of a given underlying currency, such as the U.S. dollar or the euro. Like all other ETFs, currency ETFs are traded just like stocks on regular U.S. exchanges. Currency ETFs are commonly structured in one of two ways: either as a currency pair ETF, which reflects changes in the exchange rate between two specified currencies, or simply as a single-currency ETF designed to track the overall performance of a single currency. The latter category includes the PowerShares DB U.S. Dollar Bullish Fund ETF (NYSEARCA: UUP) and the PowerShares DB U.S. Dollar Bearish Fund ETF (UDN).
The PowerShares DB U.S. Dollar Bullish Fund, designed to profit from increases in the overall value of the U.S. dollar, reflects the performance of the Deutsche Bank Long U.S. Dollar Index Futures Index. The index is composed of long futures contracts that are intended to track the performance of long (buy) positions in the U.S. dollar against the euro, the British pound, the Canadian dollar, the Swedish krona, the Swiss franc and the Japanese yen.
The PowerShares DB U.S. Dollar Bearish Fund is simply the inverse of the bullish fund. Based on the Deutsche Bank Short U.S. Dollar Index Futures Index, the fund represents a short (sell) position in the U.S. dollar as measured against the same currencies used for the bullish fund. Shares of this ETF increase in value when the overall value of the U.S. dollar declines.
Characteristics
Both of these ETFs are products of DB Commodity Services and issued by Invesco's PowerShares group. The two funds have identical expense ratios of 0.8%. Since the funds represent investments in futures contracts rather than stocks, neither one offers a dividend yield.
The allocations of long or short U.S. dollar futures positions against the various currencies included in the underlying Deutsche Bank indexes are heavily weighted with the performance of the U.S. dollar against the euro, which accounts for a bit more than half of the total index. Futures positions representing the dollar against the Japanese yen and the dollar against the British pound make up approximately 10 to 15% of the index each, thus accounting for another 20 to 30% of the index together.
Both funds are traded on the NYSE ARCA exchange. The bullish fund, with an average daily trading volume of about 3 million shares, has significantly greater liquidity than the bearish fund.
Suitability and Recommendations
There are a number of reasons an investor may wish to take advantage of using one or the other of these currency ETFs. Currency ETFs provide an easy way to obtain exposure to the forex market with a single investment that doesn't require actively trading in the forex market itself. Investors who believe that the U.S. dollar will appreciate in value overall would select the bullish fund, while investors who expect the dollar to experience an overall decline in value would choose the bearish fund. In effect, these two funds additionally provide the opportunity to trade the U.S. dollar against multiple currencies with a single investment.
Another possible use of these ETFs is as a hedge against otherwise heavy investments in U.S. stocks or the U.S. dollar. Positions in one or the other of these funds may reduce volatility and mitigate losses experienced elsewhere in an investment portfolio.
Five-year returns between 2010 and 2015 show the bullish fund having the advantage, with approximately a 15% gain, while the bearish fund is down approximately the same percentage. Obviously, a long-term trend change for the dollar could reverse the fortunes of both funds.
