Nuclear Tests and War of Words
Safe haven currency funds have been gaining investor attention, owing to rising geopolitical concerns. Despite widespread global criticism, North Korea has been continuously testing missiles to develop a nuclear program in order to safeguard itself from potential U.S. invasion, per North Korean leader Kim Jong-Un (read: North Korea Jitters: ETF Winners and Losers).
North Korea conducted its seventh nuclear test, an Inter Continental Ballistic Missile that flew over Japan, on Sep 14, 2017. In response to continuous missile tests, President Donald Trump in his maiden UN General Assembly speech threatened to completely destroy North Korea.
This prompted North Korean leader Kim Jong-Un to warn the United States of the "highest level of hard-line countermeasure in history”. He lashed out at the United States President, saying, “I will make the man holding the prerogative of the supreme command in the U.S. pay dearly for his speech”. Moreover, North Korea’s foreign minister Ri Yong Ho suggested that another hydrogen bomb test in the Pacific Ocean might be in the cards.
Although The United Nations (UN) approved fresh sanctions on North Korea on Sep 11, they were too lenient compared to what Nikki Haley, the U.S. ambassador to the UN, had initially proposed. Sanctions were watered down in order to secure China and Russia’s support, as they held veto power on the decision.
Moreover, the United States imposed harsh fresh financial sanctions on North Korea. In the words of Treasury secretary Steve Mnuchin, "Foreign financial institutions are now on notice that going forward they can choose to do business with the United States or North Korea, but not both".
Let us discuss a few currency ETFs impacted by the rising geopolitical risks relating to North Korea (see all Currency ETFs here).
PowerShares DB US Dollar Bullish Fund (UUP - Free Report)
This ETF seeks to provide exposure to the U.S. dollar. Although the U.S. dollar surged after the Fed announced its plan to start winding off its $4.5 trillion balance sheet, geopolitical concerns weighed on it. Per etf.com, UUP experienced $4.78 million in inflows between Sep 19, 2017 and Sep 21, 2017, primarily because of Fed’s decision. It’ll be interesting to see how latest developments in the geopolitical space affect the fund’s flows (read: Best ETF Strategies for a Hawkish Fed).
It has AUM of $613.1 million and charges a fee of 80 basis points a year. It has lost 10.3% year to date and 3.0% in a year (as of Sep 21, 2017). As such, UUP currently carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Japanese yen and Swiss franc funds are the go-to investment vehicles in periods of rising risks. Although Japan’s proximity to North Korea creates doubts over its reliance as a safe haven currency, its significant foreign asset position makes it a good bet. Moreover, yen’s track record of safeguarding investors from global risks may also be a factor for its current relative appeal.
CurrencyShares Japanese Yen Trust (FXY - Free Report)
This ETF seeks to provide exposure to the Japanese yen.
It has AUM of $115.4 million and charges a fee of 40 basis points a year. It has returned 4.3% year to date but has lost 10.9% in a year (as of Sep 21, 2017). As such, FXY currently carries a Zacks ETF Rank #3 with a Medium risk outlook.
CurrencyShares Swiss Franc (FXF - Free Report)
This ETF seeks to provide exposure to the Swiss franc.
It has AUM of $155.6 million and charges a fee of 40 basis points a year. It has returned 4.7% year to date and 1.5% in the last one year (as of Sep 21, 2017). As such, FXF currently carries a Zacks ETF Rank #3 with a High risk outlook.
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