Avoid These Commodity Currency ETFs Going Into 2015

Broad commodities are facing tough times with volatility intensifying in recent months. Products in a variety of segments have seen bumpy trading thanks to tumbling oil prices, strengthening dollar, supply glut, bumper U.S. harvest and threats of global economic slowdown.

While the U.S. economy is improving, China is seeing sluggish economic growth and recovery in Europe is stalling despite the stimulus package. Additionally, continued bullishness in the stock market as well as increased appetite for riskier assets added to the woes. This trend is likely to persist should broad economic trends continue.

Though this situation has created selling pressure in many commodities, it has also set an extremely bearish tone for commodity currencies. The currencies of oil exporting nations were at the forefront of the decline as oil prices plunged to the five-year low after the Organization of the Petroleum Exporting Countries (:OPEC) decision of not reducing its current oil output level (read: 3 Energy ETFs Hit the Most by OPEC's 'No Cut' Decision).

In particular, Russian ruble stole the show, plunging to all-time lows against the U.S. dollar while other oil-linked currencies such as the Canadian dollar, Norway’s krone, and Nigeria’s naira also slipped to record lows. The Australian dollar has also plummeted to a four and half year low prompted by a lower commodity prices, soft inflation, weakness in the domestic economy and disappointing data from China's massive manufacturing sector.

While this is not enough, the currency war has escalated in recent months as a number of countries around the world have chosen loose monetary policies to stimulate growth and prevent deflationary pressures. This is in contrast to the U.S. policy where the Fed has tightened its stimulus program by wrapping its QE3. The diverging central bank policies have propelled the U.S. dollar to multi-year highs.

Further, strong U.S. economic recovery, the possibility of interest rate hikes sooner than expected, and sliding oil prices have contributed to the greenback's strength (read: 3 Excellent ETFs to Play the Dollar Surge).

In such a backdrop, commodity currencies will likely see sluggish trading next year. Below, we take a closer look at some of the ETFs providing exposure to the commodity currencies that investors should avoid for the time being.

WisdomTree Commodity Currency Fund (CCX)

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 in eight currencies – Australian Dollar, Brazilian Real, Canadian Dollar, Chilean Peso, Norwegian Krone, New Zealand Dollar, Russian Ruble, and South African Rand – almost in equal proportions (read: 3 Commodity Country ETFs to Watch on U.S. Dollar Strength).

The fund is often overlooked by investors as depicted by its AUM of just $9.2 billion and average daily volume of about 10,000 shares. It charges 55 bps in annual fees. The ETF was down 9.8% over the past three months and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook.

CurrencyShares Australian Dollar Trust ETF (FXA)

This fund offers a great play to capitalize the future rise in the Australian dollar relative to the U.S. dollar. It tracks the movement of the Australian dollar relative to the USD, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Australian dollars.

The product has amassed $273.5 million in its asset base while trades in moderate volume of 60,000 shares per day on average. It has an expense ratio of 0.40% and was down 9% in the past three months. The fund has a Zacks ETF Rank of 4 with a High risk outlook.

CurrencyShares Canadian Dollar Trust ETF (FXC)

Like FXA, this ETF provides investors exposure to the Canadian dollar relative to the U.S. dollar. It 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 (see: all currency ETFs here).

In terms of the fund’s structure, the product charges 40 bps a year in fees and sees moderate volume of more than 64,000 shares a day. The ETF has accumulated $244.2 million in its asset base and lost about 4.5% in the trailing three-month period. FXC has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

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