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Emerging Market Currency ETFs: Three Standouts for 2012


ETFs from India, Brazil, and Mexico have started the year on a high note.

Investors exposed to currency products in late 2011 likely saw losses across the board as the US dollar was one of the few winners in this time period. In the last quarter of the year, PowerShares DB USD Index Bullish (UUP) rose by 2%, while investors in other currencies saw flat performances as both emerging and developed currencies struggled in the final three months of the year. This outperformance of UUP continued the trend in currency markets from the third quarter as well, leaving many foreign currencies in a double-digit hole to start 2012.

While many commodity currencies, as well as the euro, suffered in this time period, the losses were the biggest in products such as the WisdomTree Dreyfus Emerging Currency Fund (CEW) which tracks a basket of emerging market currencies. This fund holds 12 currencies in total, offering investors exposure to currencies across Asia, the EMEA region, and Latin America, giving the product broad exposure across the space. As a good barometer of emerging market currency performance, investors should note that CEW had a lackluster end to 2011, finishing the period flat but with slightly greater losses and higher levels of volatility than their developed market counterparts.

Yet despite this underperformance and greater movements in December, a variety of these currencies have been surging in the new year. In fact, CEW jumped by close to 6.3% in the month of January, far outpacing a variety of developed currencies, including those tracking commodity-based economies such as Canada or Australia. Beyond the impressive returns from this product, investors have also seen a few individual emerging currencies soar to start the year. Below, we highlight three of these standouts and why they have been such huge beneficiaries in the first part of 2012:

1. WisdomTree Dreyfus Indian Rupee Fund (ICN)

The Indian economy was severely beaten down in 2011 but appears to be on the cusp of rebounding this year. The country seems to finally have inflation under control, which is increasing demand for rupees by foreign investors and especially those who are looking to diversify out of other emerging market currencies. Beyond slumping inflation, the rupee is also likely seeing interest from those searching for bargains as the currency was one of the worst performing ones in the world last year. Many are likely looking for a reversal in 2012, and given the improving fundamentals for the nation, it could certainly be the case this time around.

ICN represents one of a few ways to play the Indian currency in ETP form, charging investors 45 basis points a year in fees for its services. The product looks to achieve total returns reflective of both money market rates in India available to foreign investors as well as changes in the value of the Indian rupee relative to the American currency. The product has gained about 8.1% so far in 2012, which represents a nice change of pace from the fund's double-digit slump in 2011.

2. WisdomTree Dreyfus Brazilian Real Fund (BZF)

Much like India, Brazil has seen strong gains in its currency to start the year thanks to improving macroeconomic factors. The country remains a huge exporter of a variety of agricultural and energy commodities, so the recent jump in commodity prices has certainly sparked some interest in the real to start the new year. Additionally, the higher level of risk tolerance has boosted demand for riskier currencies like the real, helping to overshadow the country's plans to push rates below double digits at some point this year. It should also be noted that muted inflation rates have also helped this trend, but at the same time, some policymakers are growing concerned over the robust strength of the currency as many are eyeing an intervention to weaken it at some point this year.

Nevertheless, the main ETF tracking the nation's currency, BZF, has gained about 7.9% so far in 2012, putting it into second place among exchange-traded currency products. However, investors should realize that BZF doesn't just track the movements of the real against the dollar, but much like ICN, tracks money market rates that are available to foreign investors as well. This factor has certainly helped BZF to start the year, as Brazil has one of the highest one-month deposit rates in the world, although this currently makes up a small portion of the overall fund's basket. However, the strong performance so far this year likely comes as welcome news to many investors, as BZF had tumbled by about 4% over the course of 2011.

3. CurrencyShares Mexican Peso Trust (FXM)

Since Mexico does more than half of its imports and exports with the US, the country is often heavily influenced by events in the United States. While this was detrimental to Mexico during the height of the Great Recession, as the US has rebounded out of the slump, it has helped to pull Mexico up with it as well. Furthermore, while the American economy seems to be on the upswing, the Federal Reserve's low interest rate policy seems likely to stay for quite some time, boosting the appeal of other currencies in the region. Given that Mexico could benefit from both trends in the US, it should be no surprise that the peso has been a strong performer to start the year.

In order to play the Mexican peso, investors should consider CurrencyShares' FXM. The product looks to track the price of the Mexican peso against the dollar, net of trust expenses. FXM also expects to pay out interest earned from deposited Mexican pesos, which have a current interest rate just under 2.4%, according to the CurrencyShares website. The fund has added about 7.3% so far in 2012, helping to erase some of the bad memories from the previous year. In that time period, the fund lost about 10% of its total value, falling along with many other emerging market currencies on the year.

Editor's Note: This article was written by Eric Dutram. To read it on, click here.

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