I have had two emails/comments about a new product in the works from Deutsche Bank that will invest in currencies in an ETF format. For now the name is DB Currency Index Value Fund and will have ticker (DBV). The folks over at IndexUniverse call the fund a doozy.
According to IndexUniverse the fund will go long the three highest yielding currencies of the G10 currencies and go short the three lowest yielding currencies of the G10. It will exclude the US dollar. The three currencies it goes long will be leveraged by a factor of two.
The general idea behind the concept is that higher yielding currencies tend to outperform lower yielding currencies. Naturally Deutsche Bank has back tested data that makes this index, called the G10 Currency Future Harvest Index, look compelling.
This is an actively managed product, it will rebalance quarterly, compared to the Euro Currency Trust (FXE) and the proposed currency ETFs that will passively capture the Aussie, Mexican Peso, Swissi, Swedish krona, loonie and the British pound.
I think this can be a good idea for investors that want to diversify out of some of their dollar exposure. Like most investment products there is a flaw and this one, while obvious, may not be a huge negative in terms of results but needs to be understood nonetheless.
The index is built on a truism that higher yielding currencies generally do better than lower yielding currencies. Another truism is that currencies tend to do well when interest rates start to go up. This is one of the reasons I have been favorable to Sweden, the Riksbank (Swedish central bank) is in the early stages of a tightening cycle. Ditto the Norges Bank in Norway.
Viewed as an asset class, DBV, if it comes, will do the job of providing exposure which is the important thing. That it will or will not be the single best way to own foreign currency is far less important.
This type of new, for most people, asset class diversification is something I have been writing about for a while. I have been writing that I think it will become more important for US based investors and that there will be more and more products that will allow different ways to access currencies.
To repeat something from earlier this week, currency products should not be thought of as low risk equity investments. They should be thought of as high risk cash investments.
Wikinvest Wire
3 comments:
DBV looks very interesting and one can hardly quarrel with risk adjusted returns like that (even better than the BuyWrite index) to say nothing of low market correlation but it looks like the SEC's apparent reluctance to approve ETF products that include shorting could be a problem.
Certainly worth keeping an eye on in any case, thanks.
Speaking of BuyWrite, there were a number of new products developed recently that use that strategy, which ones seem to be behaving the best in your view? By "best" I don't necessarily mean best performance but something more like predictability, or at least role consistency within portfolio mix.
RW,
Perhaps I have missed some of the new products tied to the buywrite index. Feel free to pass the tickers along and I will take a look at them. Thank you,
Roger, I probably made that question too specific, maybe too branded would be closer: I was thinking about covered call funds.
AFAIK there are no ETF's actually based on BXM (the CBOE BuyWrite index) so no tickers to offer although there might be an ETF or two that uses the strategy - selling the near-term, at-the-money S&P 500 Index (SPX) call option against the S&P 500 stock index portfolio - but regardless I meant to be more general than that: Change BuyWrite to Covered Call in my question.
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