Thinking of investing in a currency fund to add a little spice to your portfolio? Think again. Investment researcher Morningstar has reviewed currency exchange traded funds listed on the ASX and concludes that they are not an attractive long-term investment.
Currency ETFs track the performance of a given currency and, typically, investors make money if that currency increases in value against the Australian dollar.
Currency ETFs are often seen as a tool for speculators, who want to bet on the political, economic or other macro events that drive currencies.
Supporting this view, Morningstar found that trading volumes in BetaShares British Pound ETF spiked in June last year, during the Brexit referendum, again in October, when UK Prime Minister Theresa May said she would trigger Article 50 to start of process of the UK leaving the European Union.
And there was another spike in June this year, when May called an election.
Other uses of currency ETFs include hedging portfolio risk and hedging the costs of future foreign currency outlays.
“We think these uses appeal to traders and sophisticated or institutional investors. It’s a niche area for retail investors and has the potential to be misused,” Morningstar says.
“Another reason we haven’t raced to cover currency ETFs is that in the long run currency doesn’t pay – or at least not much.
“In a currency ETF your money sits in a bank earning a modest rate of interest. After fees are deducted the interest earned on, say, a US dollar exchange traded fund is miniscule. This means investors only gain if the US dollar rises against the Aussie, which comes down to timing rather than long-term investing.
“In the long term, currencies tend to revert to their long-term valuations, whereas a company should grow its earnings and dividends over time. Currency ETFs are not an attractive long-term investment, in our view.”
There are seven currency ETFs on the ASX, five issued by BetaShares and two by ETF Securities.
A couple of the funds, BetaShares Strong US Dollar and BetaShares Strong Australian Dollar, are leveraged. On a given day, BetaShares Strong US Dollar is expected to deliver a 2 per cent to 2.75 per cent return for every 1 per cent appreciation in the US dollar against the Aussie.
The fund has delivered more volatile returns that it plain vanilla counterpart, BetaShares US Dollar, since its inception.