Top Long and Short US Dollar ETF for Investors

US dollar has broken out of its long term downtrend. US dollar exchange trade fund can be one of many ETF portfolio strategies which can add uncorrelated returns, as a hedge to stocks with significant international presence and enhance diversification. There are 2 primary kinds of USD ETFs Investor can use to gain this exposure.

You can either buy ETFs with underlying exposure of a US dollar index which holds a basket of currencies against the US dollar or single currency ETFs that includes US dollar (i.e EUR:USD or AUD:USD). The choice of using particular particular ETF depends largely on the risk the investor is willing to bear.

Trading the movements in the US dollar through US dollar index is a lower risk option. Using a basket of currencies would minimise volatility as overall return is based on the combined return of a diversified portfolio of currencies. Using a US dollar index based ETF would be for investors who would rather follow the bullish or bearing trend in the US dollar rather than against specific currencies. Also see our Emerging market debt ETF research for in depth analysis of best emerging market ETFs.

On the other hand, for investors who thinks the US dollar would outperform against specific currencies. ETF providers have created a number of funds that tracks single currency movements using the US dollar.

USD Index Longterm Breakout

US Dollar breaks long term downtrend

 

US Dollar Index ETFs

Fund Name Ticker Index Gearing
PowerShares DB US Dollar Index Bullish Fund UUP Deutsche Bank Long US Dollar Index 1x
WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU Bloomberg Dollar Total Return Index 1x
PowerShares DB 3x Long US Dollar Index Futures Exchange Traded Notes UUPT Deutsche Bank Short US Dollar Index 3x
PowerShares DB US Dollar Bearish Fund UDN Bloomberg Dollar Total Return Index 1x

 

Long US Dollar ETF

PowerShares DB US Dollar Index Bullish Fund (UUP) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) tracks a basket of currencies against the US dollar. These weights of individual currencies in each baskets varies between providers:

Index Currency PowerShares DB US Dollar Index Bullish Fund WisdomTree Bloomberg U.S. Dollar Bullish Fund
Euro 57.6% 31.6%
Japanese Yen 13.6% 18.8%
British Pound 11.9% 9.5%
Canadian Dollar 9.1% 11.5%
Swedish Krona 4.2% 0.0%
Swiss Franc 3.6% 4.2%
Mexico Peso 9.7%
Australian Dollar 6.1%
South Korea Won 3.4%
Chinese Yuan (Offshore) 3.0%
Brazilian Real 2.2%
Total 100.0% 100.0%


Investors should note however that while Powershares UPP ETF follows the US dollar index (spot). The underlying instruments used in tracking the index is through FX futures contracts traded on the ICE exchange. There may be tracking errors and additional cost using futures rather than spot positions.

WisdomTrees (USDU) US dollar ETF includes a much more diversified basket of currencies. The primary difference is the inclusions of some emerging market currencies such as the Brazilian Real (BRL) and Mexico Peso (MXN). Additionally while both basket have certain exposure to Asia through large weights for the Japanese Yen. The addition of the Australian Dollar, South Korean Won and Chinese Yuan weights is at the expense of Euro and Japanese Yen. Overall the inclusion of additional currencies offset the risks of higher risk currencies.

Powershares highlights that the volatility over a number of timeframe. This provides a guide for investors in the index to understand future volatility of the index.

Daily volatility over full history 8.82%
Average rolling 3 month daily volatility 8.54%
Monthly return volatility 8.84%
Average annual volatility 8.68%

 

 

Annualized daily volatility of US Dollar index.

Annualized US dollar index daily volatility

 

The annualized volatility shows volatility goes in trends, with gradual decrease and increase over set number of years. This has been trending down since 2009.

Leveraged US Dollar ETF

Investors wishing to use inherent leverage in ETF to dollar etf 3x the index movement can use PowerShares DB 3x Long US Dollar Index Futures Exchange Traded Notes (UUPT). The underlying index for UUPT is the same as UPT. Note the introduction of leverage severely increase the risk of the position.  In 2014 Deutsche Bank decided to redeem the ETF so it will no longer be traded.

Short US Dollar ETF

PowerShares DB US Dollar Bearish Fund (UDN) is an inverse dollar ETF. UDN gains in value when the US dollar declines against the basket of currencies the index tracks (this is similar to inverse ETFs like the Inverse S&P 500 Index ETF). If borrowing cost is not significant from your broker. You can create a leveraged inverse dollar ETF through shorting UUPT. This would create a 3x leverage short USD dollar ETF.

Individual currency against US Dollar ETFs

The list of ETFs below are single currency funds investors can use to gain USD FX exposure.

The position column for each ETF highlight the specific position investors are taking versus the USD. Investors should note that taking specific positions would be a lot more risky than using a basket of currencies in the US dollar index funds above. Annualized daily volatility and total returns profiles differ currency by currency.

These are also more leverage position focused funds. However a smaller position in the portfolio can be used to compensate the inherent leverage in these ETFs if investors wish to minimise impact of leverage.

Fund Name Ticker Position Index Gearing
Short Euro EUFX Long USD / Short EUR Euro/US Dollar -1x
Ultra Australian Dollar GDAY Short USD / Long AUD Australian Dollar/US Dollar 2x
Ultra Euro ULE Short USD / Long USD Euro/US Dollar 2x
Ultra Yen YCL Short USD / Long Yen Yen/US Dollar 2x
UltraShort Australian Dollar CROC Long USD / Short AUD Australian Dollar/US Dollar -2x
UltraShort Euro EUO Long USD / Short EUR Euro/US Dollar -2x
UltraShort Yen YCS Long USD / Short Yen Yen/US Dollar -2x