4 ETFs To Trade the Euro (FXE, ULE)
By Anthony Jerdine March 03, 2016
In December 2015, the U.S. dollar reached its highest close since 2003, and the euro its lowest close since 2003. These could be significant highs and lows, and many investors may be entering currency trading hoping to avoid the carnage in stocks, junk bonds and commodities from over the previous few months. Making money in currencies is not an investment layup in any sense, but currency exchange-traded funds (ETF) provide a convenient way to become involved in currency trading without the requirement of a separate forex account. Traders interested in the euro’s next move, for example, have a number of ETFs that allow them to test their hunches.
CurrencyShares Euro ETF
For currency ETFs, managers attempt to hit their benchmark objectives by utilizing currency futures, forward contracts and various derivative products. The granddaddy of long euro currency ETFs is the CurrencyShares Euro ETF (NYSEARCA: FXE). It is sponsored by Guggenheim Specialized Products, LLC and first appeared in December 2005. This unlevered ETF should be the first choice for investors who want to go long the euro. Net assets total $275 million, and liquidity is excellent with an average of 393,000 shares traded daily. Expenses are also low at 0.4%, and bid/ask spreads are tight. Similar to other currency ETFs, FXE trades only during regular stock market hours and is not actively managed. Its objective is to track as closely as possible the performance of the EUR/USD cross rate, and it does a good job in accomplishing this task. The year-to-date (YTD) return of FXE was 3.5% at the close on Feb. 12, 2016. In comparison, the TradeStation forex platform shows the EUR/USD returned 3.7%. The tracking is not perfect but it is probably close enough for most traders.
ProShares Ultra Euro ETF
ProShares offers a long euro ETF, the ProShares Ultra Euro ETF (NYSEARCA: ULE), designed to provide a leveraged return equal to twice the daily return of the dollar versus the euro. It does not offer an unleveraged option. The problem with leveraged products is the effects of compounding over more than a one-day period often produce slippage, and tracking the benchmark becomes more difficult. ULE’s YTD return of 6.8%, while double the return of the EUR/USD currency pair, equates to 7.4%. Another issue is the high expense ratio of almost 1% compared to FXE’s 0.4%. Total assets are $12 million, and average volume is 3,600 shares per day. Liquidity and bid-ask spreads are poor in comparison to FXE.
ProShares Short Euro ETF
To go short the euro, investors can consider the ProShares Short Euro ETF (NYSEARCA: EUFX). This ETF is unlevered and aims for daily investment results that correspond to opposite the performance of the EUR/USD cross. EUFX began trading in 2012, and it has not been a roaring success. Expenses are high at nearly 1%, and assets total $17 million. Benchmark tracking is good, however, showing a return of -3.5% at the close on Feb. 12, 2016. The reason for the lack of activity in EUFX is traders have flocked to the leveraged version of this ETF. A consideration for investors who resist leveraged ETFs is to short-sell FXE if the shares can be borrowed from the broker. This is an option for more sophisticated people familiar with the potential downside of short positions.
ProShares UltraShort Euro ETF
The ProShares UltraShort Euro ETF (NYSEARCA: EUO) is by far the most frequently used ETF to short the euro. It is leveraged and attempts to double the opposite return of the EUR/USD cross rate. The expense ratio of almost 1% is high, but that comes with the leveraged ETF territory. Total assets clock in at $420 million with average daily volume of over 400,000 shares. In terms of hitting its benchmark, it has performed admirably thus far in 2016. The opposite return is -7.1% compared to the 7.4% of the EUR/USD cross rate. In fact, it has done a better job than the ProShares Ultra Euro ETF, slipping only 300 basis points from the benchmark versus a drop of 600 basis points for ULE. This difference may be attributable only to random noise in the short term, but ProShares measured the correlation to the benchmark as -0.99 during the fourth quarter of 2015, which is a very high inverse correlation.
The Bottom Line
There are several ETF choices for investors who have the inclination to trade the euro and want to avoid the complications of a separate forex account. Investors should understand the performance characteristics of these ETFs before making any decisions.