ETF Strategist - Fixed Income

If the Global Recovery Looks Fast, Ride Growth Currencies

It may not be clear just yet, but the global economic recovery will eventually return to a healthy pace, and demand for raw materials and commodities will continue to grow.

Peter Mintz | First Light | Getty Images

And since the global economy is increasingly interconnected, that should be good news for growth-oriented currencies, and the exchange traded funds, that trade on them.

It’s unlikely that the Federal Reservewill make any tightening moves in the coming months. If anything, economists are discussing the possibility of further easing moves in the wake of the latest nonfarm payroll report.

Central banks and policymakers around the world have also been taking steps to spur growth. And currency ETFs can be a good way for individual investors to express a point of view on the economy.

Currency ETFs “are investments that in general are not going to be as volatile as stocks or as some of the bond ETFs,” says Gary Gordon, president of Pacific Park Financial, an investment advisory firm.

While currency ETFs represent just a tiny fraction of the overall ETF market, with only a few dozen funds and less than one-half of 1 percent of the $1.14 trillion in U.S.-listed ETF assets, you do have a variety of choices if your goal is to express a bullish view on the global economy.

Demand for commodities will likely increase if the global economy strengthens, which would be good news for the currencies of commodity-exporting countries. “If you think commodities are going to go on a run, you’d probably like the Australian dollar, the Canadian dollar, or the Russian ruble,” says Gordon. Guggenheim Investments’ CurrencyShares funds include the CurrencyShares Australian Dollar Trust, a play on the Australian dollar, and the CurrencyShares Canadian Dollar Trust for the Canadian dollar.

(The Australian dollar’s performance is usually closely tied to China’s economic activity, since China is Australia’s largest trading partner, so if you are bullish on China in particular, Australian currency ETFs are worth watching.)

Oil prices would probably rise if the global economy strengthens, and currencies of countries that export oil would be likely beneficiaries. The Canadian dollar is one option, but you can also consider ETFs representing currencies like the Norwegian krone and the Mexican peso.

An expanding global economy would probably also have an outsized positive effect on emerging markets. In that scenario, Gordon says he would look at a currency ETF like the WisdomTree Dreyfus Brazilian Real Fund.

Anthony Davidow, portfolio strategist at Guggenheim Investments, which manages the Currencyshares ETFs, says he thinks China's currency has upside potential. "The basic premise is it's undervalued," thanks to China's efforts to keep its exports growing, "and China will have to be part of any sort of global recovery." 

In addition to single-currency ETFs, there are also ETFs representing a basket of currencies. For investors who don't want to construct their own currency basket using ETFs, or monitor an array of single-currency ETFs, these may make more sense.

Consider currency-basket ETFs composed of emerging-market currencies or of currencies from commodity exporting countries to express a bullish outlook. Several firms offer this type of ETF.

Another way to take a bullish view on the economy is to take a bearish view on currencies that investors normally use to take cover from economic storms: the dollar  ,the yen and to a lesser extent the Swiss franc . PowerShares DB U.S. Dollar Index Bearish Trust performs like a futures index based on a short position on the U.S. dollar index.

However you decide to take a position, experts agree that it’s important to consider currencies when constructing your portfolio.

“Historically, people didn’t have to worry about foreign currencies,” says Michael Rawson, ETF analyst at Morningstar. “Now the importance of trade in our economy has increased, and the importance of inflation has increased. We recognize that demand for internationally traded goods — food, oil — are based of international demand, not just U.S. demand.”