ProShares, the Maryland-based ETF issuer best known for its leveraged and inverse ETFs is back launching more funds just one week after it debuted two triple leverage products targeting the financial space. This time, the company is expanding into the leveraged currency market with ETFs tracking both the 2x and -2x return of the U.S. dollar price of the Australian dollar in a single day.
The launch of ProShares’ double long fund, the Ultra Australian Dollar ETF and the firm’s double short fund, the UltraShort Australian Dollar ETF (CROC - ETF report), not only have some of the best ticker symbols in the market, but help to expand the company’s lineup in the currency space to seven funds overall. Investors should also note that both look to charge investors 95 basis points a year in fees and will implement a daily rebalancing mechanism.
This daily rebalancing means that if investors are holding a position in GDAY or CROC over long time periods, the return may deviate from what investors are expecting. This is largely due to the impact of daily compounding over long periods of time, a factor that can be especially prevalent when the Australian dollar isn’t a defined trend but is instead oscillating back and forth from day to day (read Understanding Leveraged ETFs).
Still, as long as investors keep this in mind, they can use either of these products to make a play on the Australian dollar with leverage. In fact, CROC and GDAY are the only leveraged products in the currency space that are targeting the Australian dollar, and are just the seventh and eighth currency ETFs that employ a leveraged approach on a single currency overall.
How to use CROC and GDAY
Either of these products can be used to make a bet on the increasingly in-focus Australian economy. The country is relatively isolated from many Western issues and, is instead, increasingly tied to the economic health of China and other major developing markets (read Australia ETFs: a Developed Market Play on Asian Growth).
This is largely due to Australia’s impressive commodity prowess especially in the base metals and energy product categories. Thanks to these key goods, China is now the destination for roughly one-fourth of Australia’s exports, while India and South Korea account for another 15% as well.
With these commodities, Australia finds itself in a relatively favorable economic condition, as the GDP is still growing, unemployment is low compared to other Western nations, and public debt is still moderate at around 30% of GDP (see Australia Bond ETF Showdown).
However, the robust nature of the Australian economy, coupled with an impressive central bank discount rate above 4%, has led to huge inflows into the Aussie markets in a variety of sectors. Some now fear a property bubble in the country, but it remains to be seen if this will fizzle out or implode like we have seen in the American market.
One thing is for sure though; the Australian dollar has been a huge winner over the past few years, crushing the performance of many of the other globally traded currencies. The Aussie dollar has actually added almost 40% against the U.S. dollar since the crash in 2008, suggesting that the currency is certainly prone to volatility, but it can also be a place to capture big gains in the currency market (see Developed Asia Pacific ETF Investing 101).
Given the somewhat high historical volatility of the Australian dollar compared to other currencies, this group of leveraged products could see some interest from hedgers and traders alike. This could be especially true if we see similar performance out of the Aussie currency in the months ahead or if China faces a severe slowdown, making GDAY or CROC excellent ways to bet on any important moves in these key markets both up and down.
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