CEW WisdomTree Emerging Currency Strategy Fund

Currency ETFs remain an underappreciated corner of the fund world. While there are about three dozen products currently on the market in this space, combined, they only possess less than $5 billion in AUM.

However, investors should note that most of the funds in this space are single currency, passively managed funds. That means that they are probably more appropriate for those looking to hedge out exposure to a single currency, or those who are looking to make a specific bet on the dollar against one medium of exchange.

Still, there has also been a bit of a push to more active basket products which hold a variety of currencies, and seek to provide investors with uncorrelated returns. This type of exposure is well-suited for active management for those who are able to read the forex markets and move investors into and out of the right currencies at the correct times (read Bet Against the Dollar with These Three Currency ETFs).

In this vein, PIMCO has recently pushed out a currency ETF of its own, the first from the traditional bond giant, in order to capture assets in this interesting but often overlooked space. The new fund, the Foreign Currency Strategy ETF (FORX), looks to provide global exposure to foreign currencies, and truly shake up the current offering lineup in the space.

FORX Currency ETF in Focus

The new fund looks to go long in a variety of foreign currencies and is likely to appreciate if the American dollar goes down. In order to accomplish this task, FORX will invest in not only currencies, but forwards and fixed income securities denominated in foreign nations as well.

The ETF looks to limit holdings in any single currency to 20% of the portfolio, and to have a low duration between zero and three years. At time of writing, this level of duration came in at roughly half a year, while the total cost, after fee waivers, is 65 basis points a year.

In terms of holdings, the fund currently possesses over 30, with a heavy focus on North America and the broader European regions. Norway and Canada take the top spots at just under 15%, while Russia and Mexico round out the top four (read Is It Time to Buy The Hedged Currency ETFs?).

This suggests that the product has a nice mix between developed and emerging currencies, giving the fund a balanced approach from a risk perspective. However, most of the top holdings are what is known as ‘commodity currencies’ so they could be heavily dependent on natural resource prices going forward.  

How does it fit in a portfolio?

This product could be an interesting choice for investors seeking a new currency play, or a way to broadly hedge out some dollar risk. The fund could also be a good pick for investors who believe in active management and that a portfolio manager can add value in this asset class.

Just note that this active management will result in a bit of extra costs so it may not be the best choice for those seeking a rock-bottom expense ratio. Currency products are also not known for their big moves, so FORX is unlikely to be a big winner (or loser) compared to many funds in a portfolio.

Can It Succeed?

The fund doesn’t exactly have a huge number of competitors, but there are few other options for investors in the basket currency space. First is the WisdomTree Commodity Currency Fund (CCX), a product that zeroes in on ‘commodity currencies’.

This gives it an exposure profile similar to—at least the current top holdings—of FORX while doing so at a lower cost of 55 basis points a year. However, the fund doesn’t exactly have a huge following, and its limit to commodity currencies could hurt the fund if natural resource prices fall (see The Key to International ETF Investing).

Beyond that fund, there is the relatively popular Emerging Currency Fund (CEW). This ETF has an impressive $300 million in assets and also charges a 55 basis point expense ratio for its exposure.

This product, as you might be able to guess by the name, is focused on emerging currencies, so nations like Canada or Norway will not be represented in this product. While this could help to juice returns, it could also increase volatility over what investors see in a more mixed product.

The real test will be if FORX can provide a nice level of outperformance and if its currency choices end up being the correct calls. If that ends up happening, there is no reason why this product can’t develop a decent asset base, although it may take some time in the often-overlooked currency ETF market.

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WISDMTR-COM CUR (CCX): ETF Research Reports
 
WISDMTR-EMG CUR (CEW): ETF Research Reports
 
(FORX): ETF Research Reports
 
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