We regularly discuss currency exchange-traded funds (ETFs). For example, we recently looked at the Invesco DB US Dollar Index Bullish Fund (NYSE:UUP) that could appeal to US dollar bulls as well as the Invesco CurrencyShares® Japanese Yen Trust (NYSE:FXY) that sparks interest from Japanese yen bulls. Today, we introduce another currency ETF that could be appropriate for a range of portfolios.
Invesco DB US Dollar Index Bearish Fund
Current Price: $20.98
52-Week Range: $20.70 - $21.91
Expense Ratio: 0.77% per year
This fund could be used by investors who believe the greenback could fall. The Invesco DB US Dollar Index Bearish Fund (NYSE:UDN) tracks the returns of the DB Short USD Currency Portfolio Index ER. This index comprises short US Dollar Index futures contracts that trade on the ICE futures exchange.
Essentially, UDN moves higher when the value of the dollar index declines. As discussed in previous articles, the USDX tracks the value of the greenback relative to a basket of six major world currencies, i.e., the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.
USDX has significant exposure to the euro, as well as other European currencies. UDN goes short the US dollar and, thus, is long the currencies of major US trading partners using USDX futures. So when the euro rises, the fund goes up.
The UDN fund started trading in February 2007. Its net assets stand at about $63.1 million. Over the past year, UDN is down 0.3%.
How could readers utilize UDN in a portfolio?
Market participants could use this currency ETF to speculate on the moves in the US Dollar Index. For example, those who are bearish on the greenback could buy UDN.
Similarly, speculators who expect a robust showing for the euro against the US dollar could buy UDN. In Germany, Chancellor Angela Merkel is stepping down. Therefore, foreign exchange analysts are debating what this political change could mean for the euro in the near future as a wide range of coalition possibilities are already being discussed. However, whatever the final result, many concur that the euro could move up against the US dollar.
This ETF could also act as a proxy for moves in broader US markets. Those who are bullish on the leading indices could potentially be expecting the dollar to depreciate. So again, they could go long UDN.
Those who plan to bet on interest rate moves might also be interested. All else being equal, if a country's central bank cuts interest rates, its currency's value also goes down. Thus, UDN could be used together with other ETFs appropriate for a low interest-rate environment in the US.
Investors interested in emerging markets could also consider USD. A weaker greenback is typically favorable for emerging market assets. On the other hand, those who believe emerging markets may go up, could decide to have long UDN exposure.
Commodity investors might rely on UDN as a potential hedge as well, based on the general view that most commodities and the greenback are inversely related. For example, when the US dollar appreciates, gold usually goes down in value.
However, in the commodity space, other factors come into play. So investors would need to do further due diligence depending on the commodity they are following.
Finally, entrepreneurs or business owners, like exporters or importers, who have US. dollar currency exposure could hedge potential currency risk with UDN. But putting together the perfect hedge in foreign currency cash flows over long periods is typically a complex financial transaction. Therefore, potential investors might need to consult with a financial adviser and monitor their portfolios quite frequently.
In summary, a currency ETF like UDN can bring flexibility to a large number of portfolios. However, be warned: currency markets are very dynamic, and moves can be volatile, rapid and unpredictable. Therefore, it is important to appreciate how macro economic events and political developments can affect the value of a country’s currency.