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Tough Times Ahead in Commodity Currency ETFs?

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Commodities are facing a choppy 2013, with the volatility intensifying in recent weeks. Products in a variety of segments have seen rough sessions due to a strong dollar and uncertain demand in many key markets. This is especially true given some of the fundamental factors surrounding the global economy, and the outlook going forward.

While the U.S. economy is improving, China is seeing sluggish economic growth, and Europe is still in recession. Still, we are seeing an increased appetite for equities over commodities, and this trend could continue should these broad economic trends hold.

This has led to some significant selling pressure in many commodities, though it has also led to a negative impact for commodity currencies as well. The currency issue has been especially bad this year, as the U.S. dollar has appreciated significantly, reversing a long trend in the space, further dulling foreign currencies’ appeal (read: Commodity Slide Hits Silver ETFs).

In such a backdrop, commodity currencies, such as the currencies of large commodity exporters such as Australia, Canada and New Zealand, have been under pressure last month. The growing speculation over the possible cutbacks to the Fed’s stimulus program (purchasing of bonds) amid an improving U.S. economic outlook along with the recent sell-off in the broad commodities led to further woes.

Many expect that commodity currencies could see further erosion of the big gains which the market saw in the crisis aftermath. In fact, the Australian and New Zealand dollars are still up 70% against the U.S. dollar, while the Canadian dollar has gained around 30% since late 2008.

Investors should also note that the relationship between commodity currencies and the commodity prices is narrowing, creating confusion in the market. This implies that domestic fundamentals of the country also play an important role in currency movement.

While commodity currencies are benefiting from monetary easing policies from large central banks such as the Federal Reserve and the Bank of Japan, signs of a global slowdown are pushing the currencies lower (read: Inside the Crash in Japan ETFs). As such, these currencies seem highly volatile right now and no clear trend is visible at present.

How to Play?

Given the broad weakness in the commodity space, investors might want to take a closer look at the commodity currency investments.

Products in this corner of the market could be poised for a rebound if the global economy improves, the dollar weakens and commodity prices rise, or they could head lower if more weakness is seen in key global markets. Either way, it looks to be some interesting trading ahead for the following commodity currency ETFs.

CurrencyShares Australian Dollar Trust ETF (FXA - Free Report)

The Australian Dollar ETF tracks the relative movement of the AUD relative to the USD. The product is denominated in AUD and assets are kept in a bank account, and the interest thus received is used to pay for the expenses and fees of the fund.

The fund looks to generate returns through the bank interest and any capital appreciation that may occur on account of AUD appreciating versus the USD. The ETF has amassed $484.5 million in its asset base since its introduction in June 2006.

Though FXA has lost 7.1% in the year-to-date time frame, the longer-term outlook is relatively bright as we currently have a Zacks ETF Rank of 1 or ‘Strong Buy’ on FXA going forward (read: Australian Dollar ETF Falls on Rate Cut). The product remains one of the best options for investing in the space, charging just 40 bps in fees and possessing a relatively high average trading volume as well.

CurrencyShares Canadian Dollar Trust ETF (FXC - Free Report)

This ETF tracks the price of the Canadian Dollar net of Trust expenses, which are expected to be paid from interest earned on the deposited Canadian Dollars.

This fund appears to be a great way to play future rise in the Canadian Dollars relative to the U.S. dollar. However, the product has also seen poor trading, losing 4.1% year-to-date (read: Can Currency ETF Trends Continue?).

In terms of the fund’s structure, the product charges 40 bps a year in fees. Additionally, the ETF sees a moderate volume of about 80,000 shares a day and has attracted $418.5 million of assets so far. As a result, the average bid/ask spread is modest, suggesting a little higher trading costs.

The currency ETF has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating, so we expect the pain to largely continue in 2013.

WisdomTree Commodity Currency Fund

This fund provides investors exposure to the currencies and money market rates of countries commonly known as commodity exporters. It seeks to achieve total returns reflective of both money market rates in selected commodity-producing countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar.

The product invests its assets in equal proportion among eight countries – Canada, Russia, Chile, New Zealand, Norway, Brazil, Australia and South Africa—where commodity exports are vital to the overall economy. It has an expense ratio of 0.55% and $20.8 million in AUM. The ETF is illiquid, trading in small volumes of 4,000 shares per day (read: Is the Dollar ETF About to Surge?).

CCX has delivered a negative return of 4.7% YTD and currently has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating.

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