The benefits of currency investing through ETFs | BetaShares

The benefits of currency investing through ETFs

BY betashares | 24 February 2015
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The much hoped-for “green shoots” arising from post-GFC economic stimulus are blossoming in key markets, and present some attractive opportunities for Australian investors.

The US economy, in particular, is expected to continue to improve. According to the latest forecasts from the International Monetary Fund, the US economy will grow by an above-trend 3.6% this year, before slowing to a still robust 3.3% pace in 2016.  Accordingly, as we have previously noted, the United States Federal Reserve is also inching closer to raising interest rates for the first time since the global financial crisis.

Especially for risk conscious investors, currencies are a direct way to benefit from improvements in other countries or regions without taking on equity market risk.  That’s because currency movements are generally less volatile than movements in equity markets.

By gaining exposure to US currency, Australian investors could gain should the $A decline against the greenback.

USDOLLAR

Compared to other developed economies in Europe and Japan, the US economic recovery is quite robust.  This is positive for US asset prices, including the US dollar.  A strong economy implies strong corporate profits and rising interest rates, both of which are attractive for foreign capital inflows – which tend to push up a currency’s value.

As seen in the chart above, the real US dollar exchange rate index has already started to rise from what had been relatively low levels.  Further gains seem likely.

In addition, the RBA has repeatedly stated that it is keen to see the Australian dollar decline in value against other major currencies to assist Australian exporters in the face of weak commodity prices.  This goal has seen Australian interest rates decline over the past month, and further declines are anticipated.

ETFs: an easier, cheaper way to invest in currencies

Since its launch approximately 4 years ago, investors have increasingly been using the BetaShares U.S. Dollar ETF (ASX: USD) to obtain exposure to the US dollar. The product simply holds US$ as its underlying asset – thereby providing direct exposure to movements in the A$/US$ exchange rate, and rising in value as the $A declines against the US$ (conversely, the Fund will go down if the $A goes up against the US$).

While short term currency fluctuations are inevitable, investors seeking to profit from further rises in the US dollar relative to the Australian dollar can potentially do so through an allocation to the BetaShares US Dollar ETF. In the 12 months ending 31 January, the ETF rose by 11.5% as the $A fell in value, and has produced annualized gains of 10.4% over the past three years.

Note a key difference between buying the US Dollar ETF and an investor purchasing physical US$, moreover, is the cost efficiencies of the ETF. An investor will have access to wholesale currency pricing, a key cost for retail investors when purchasing currency.  In the example below, an investor seeking $A10,000 worth of US dollars would face total investment costs of around $1000 through use of a traditional foreign currency bank account, compared with only $80 – or only one tenth as much – by using the BetaShares US Dollar ETF.

 

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2 Comments

  1. Peter  |  March 18, 2015

    If you are investing in the USD bank account because you eventually want to spend USD in the US, then this is not a completely fair comparison. If you eventually sell your ETF in AUD you still need to pay a conversion fee into USD.

    1. BetaShares  |  March 18, 2015

      Peter,
      Thanks for the comment. That is true, but there are certainly some investors who are using these accounts for ‘exposure’ purposes.

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