ProShares, a leader in inverse and leveraged ETFs, has launched its latest product in the currency space, targeting the in focus euro. The new fund, the ProShares Short Euro ETF (EUFX), looks to give investors inverse daily exposure to the performance of the U.S. dollar price of the euro.
The product looks to accomplish this task by entering into euro/US dollar futures, the first series of which expires in mid September. The product will cost investors 95 basis points a year, in line with other ProShares ETFs but somewhat higher than other non-leveraged currency products on the market.
It should also be noted that the product only seeks to match the return of the euro short against the dollar over a single day. Due to this and the compounding of daily returns, the returns of the product may deviate from long term return rates, suggesting that investors need to monitor their holdings closely if they are going to be in EUFX for a long time period (see Leveraged and Inverse ETFs: Only For Short Term Traders).
Short Euro ETF Timing
This brand new product comes at a great time for ProShares as the common currency in much of Europe has become increasingly under fire as of late thanks to a rash of bailouts and speculation over broad defaults by some of the PIIGS bloc members. Thanks to these issues, the euro has fallen from a rate of $1.45 dollars per euro to its current level just below $1.25 (see Three European ETFs That Have Held Their Ground).
This represents a nearly 12.5% loss in the past 52 week period and puts the currency among the worst performers against the dollar, out of the majors, in the time frame. Only a few emerging market nations have seen their currencies fall by more against the dollar in the last 52 weeks while only the Swiss franc—which is now pegged to the euro—has seen its ETF product lose more than what the euro has since the end of the second quarter in 2011.
Given this bearish performance and the sluggish outlook for the region, a short euro play could be an interesting way to target the currency market for many investors. This could be especially true if investors continue to see high bond yields in nations like Spain or Italy, or if Germany holds firm with its policy of opposition to more integration (Read Beyond The PIIGS, Three Troubled European ETFs to Watch).
Thanks to these trends, EUFX could see a great deal of interest from a number of traders and hedgers. Particularly because there aren’t really a whole lot of options in the short euro market, as only two other inverse ETFs currently trade for the euro, the ProShares UltraShort Euro Fund (EUO) and the Market Vectors Double Short Euro ETN (DRR).
While both of these products have performed admirably over the past 52 weeks, gaining roughly 24.5% each, it should be noted that they apply -2x leverage to their models as well. This suggests that these products will be much more volatile than EUFX and they could also suffer from more ‘decay’ issues over long time periods.
Still, both have solid levels of volume and AUM, implying that bid ask spreads will not be much of a problem for most investors. This may not be the case—at least initially—for EUFX as the product could see some wide spreads to begin with as it starts to accumulate more assets (also read Health Care ETFs & The Fate of Obamacare).
Nevertheless, EUFX could be a big hit for ProShares if investors are looking to play the euro market with lower levels of risk and volatility on the short side. It also doesn’t hurt that the new ETF has a monopoly on the space (for now), suggesting that if the euro continues to remain in focus, EUFX could be an interesting tool in investors’ arsenals for reducing losses should the situation remain dire in the common currency bloc.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Follow @Eric Dutram on Twitter