FXF Invesco CurrencyShares Swiss Franc Trust

Although the American dollar remains the world’s reserve currency of choice, a number of alternatives have grown in importance throughout the world. Namely the euro and yuan were often cited by many as currencies that would dominate global trade well into the future. However, with the European sovereign debt debacle and fears of a hard landing in China, investors are beginning to cycle back into dollars in order to ride out any more economic turmoil (see Avoid Turmoil With The Community Bank ETF).

Despite this surge in demand for U.S. dollars over the past few weeks, several currencies have remained strong performers against the greenback in 2011. By and large, they benefited from global economic trends, their roles as safe havens, and the continued interest by investors to push beyond American dollars for their currency exposure. With this backdrop, we highlight three of the best performing currency ETFs of 2011 below:

CurrencyShares Australian Dollar Trust (FXA)

Australia is somewhat of an anomaly among Western nations; it is a major commodity producer and has an interest rate that is very close to historical norms. These factors, along with strong demand for many of Australia’s products such as coal, iron ore, and gold, have created a surge in demand for the Aussie dollar among many investors. It also hasn’t hurt that the nation is one of the few large developed countries to have its budget deficit partially under control, making the country a popular choice for those seeking a new safe haven currency (see Australia Bond ETF Showdown).

These trends have helped push FXA, the main way to play the Australian currency market in ETF form, to a 4.2% gain on the year, good enough for second place among all currency ETFs. While this may be impressive, long-term investors are likely even more pleased with the performance of the fund as FXA has risen by 20% in the past three year period.

CurrencyShares Swiss Franc Trust (FXF)

Thanks to the economic strength of Switzerland and the heavy gold holdings that the country has, the franc has been one of the best performers in 2011. Investors in neighboring countries also pushed into the currency as a safe haven alternative in order to protect against further euro depreciation. These factors helped to move the franc to near all-time highs against both the euro and the dollar in 2011 before the Swiss National Bank intervened in the market. After this move, which pegged the currency to the euro, the franc failed to gain any more traction in the final part of the year.

Despite this, the main ETF to play the franc, FXF, was the third best performing currency ETF on the year gaining 1.8% since the start of January. Meanwhile, longer term performance is even more impressive as the product has produced a return of 9.5% in the past three years. This is even better when compared to the neighboring euro over the same time period as the common currency has only risen by 1.9% over the past three years (read EUFN: The Best ETF For The Euro Crisis).

WisdomTree Dreyfus Japanese Yen Fund (JYF)

The top performing currency ETF on the year is, surprisingly, this Japanese yen ETF. The fund seeks to earn current income reflective of money market rates available to foreign investors in Japan and to maintain liquidity and preserve capital measured in Japanese Yen.  The fund has gained close to 5.5% in 2011, making it far and away the best currency ETF performer of the year. While this may be shocking to some investors given the disaster that hit Japan in March, there are a number of reasons for the yen’s outperformance (also see India ETFs: Behind The Crash).

First, many Japanese investors, shortly after the quake, cashed in foreign holdings and redeployed assets back at home, creating a higher demand for yen in the process. Second, and most importantly, Japan is in a relatively solid financial position compared to the other major markets of Europe and the U.S. The country sees heavy domestic buying of its bonds and it is pretty well insulated from sovereign default worries, causing many large investors to park their cash in Japanese assets for the time being. This has allowed the yen to soar higher than its currency counterparts across the globe ensuring that this ETF, as well as the other Japanese yen funds on the market today, were among the top currency performers for 2011.

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