While the situation in the euro zone has somewhat stabilized, the uncertainty in Italy has led more questions about the common currency.
The political issues pushed the euro down against the greenback, as worries over a second leg of the crisis increased. This also led to a sell-off in many European nation ETFs, such as EWI or EWP, and caused a mini panic in some markets.
Still, the panic was relatively short-lived and the euro has been able to hold above the 1.30 mark against the dollar. This means that the euro is still up more than 3% against the greenback when looking at the past three month period, suggesting that overall, worries have been declining in Europe (read: Three European ETFs with Incredible 2012 Gains).
This better-than-expected performance in the second-most traded currency in the world has been brought about by a few key factors. First, the ECB's intervention in the sovereign-debt crisis has raised investors’ confidence in the euro zone.
Second, a subsequent sharp rally in Spanish and Italian bonds makes the currency less risky. Third, the ECB’s incredible shrinking balance sheet lends further strength to the Euro.
Further, growing business confidence in Germany and the positive outlook for the ongoing first quarter again led to the rise in the currency. Given this bullish performance and the growing confidence about the outlook for the euro zone, investors could consider repositioning their portfolios to take advantage of the rising Euro against the U.S. dollar (USD).
In addition, the continuation of monetary easing measures by the Fed could lead to a decline in U.S. dollar which would result in appreciation of the euro against the USD, especially if investors continue to shun precious metals (read: Time for Inverse Bond ETFs?).
For investors interested in this approach, we have highlighted below three funds which offer up targeted bets on the euro, a strategy that can help investors to profit if confidence over the bloc continues to rise (see more ETFs in the Zacks ETF Center).
CurrencyShares Euro Trust (FXE)
Launched in December 2005, this ETF tracks the movement of the Euro relative to the USD, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Euros.
This fund appears a great way to play future rise in the Euro relative to the U.S. dollar. The product generated returns of 1.58% last year while it has lost 1.1% year-to-date.
In terms of the fund’s structure, the product charges 40 bps a year in fees. Additionally, the ETF sees a good volume of 680,000 shares a day and has attracted $215.4 million of assets so far. As a result, the average bid/ask spread is quite small, suggesting low overall trading costs.
iPath EUR/USD Exchange Rate ETN (ERO)
Investors confident about appreciation of EUR against the USD may consider this product as well. This fund seeks to match the performance and yield of the EUR/USD exchange rate before fees and expenses. The fund holds 100% of its assets in EUR.
The product not only provides a core investment opportunity in the currency space but also enables investors holding a well diversified portfolio, to hedge their position against foreign exchange fluctuation (read: Currency Hedged ETFs: Top International Picks?).
Still, ERO has failed to attract investors with just $5.5 million in its asset base and 640 shares in average daily volume. This suggests that investors have to pay an additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.40%.
The note lost 3.8% so far in the year but is expected to fetch reasonable returns given the recent optimistic developments from the Euro zone.
Market Vectors Double Long Euro ETN (URR)
Launched in May 2008, this note seeks to track the performance of the Double Long Euro Index, net of fees and expenses. The index provides two times daily leveraged exposure of the Euro relative to the USD.
In other words, for every 1% appreciation in euro relative to USD, the index will increase by 2%.
Due to its double leverage and short-term focus, this ETN involves a great deal of risk. Furthermore, investors should note that the note has failed to attract investors so far, as AUM is below $1 million.
The product does have a relatively low cost for a leveraged fund at just 65 basis points a year, though it is hard to say if this will make up for such poor volume levels. Recent trading has been pretty hurtful to this ETF, as it is now down about 3.3% YTD, largely thanks to recent European political woes.
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