Advertisement

What Are Short Dollar ETFs and How Do They Work?

What Are Short Dollar ETFs and How Do They Work? – The U.S. dollar (USD) is the world’s most widely used and traded currency. It is the official currency of the United States and many other countries and regions. It is also the main reserve currency held by central banks and governments around the world. The value of the dollar affects the global economy, trade, investment, inflation, interest rates, and commodity prices.

READ ALSO

Advertisement

Not everyone is bullish on the dollar. Some investors may have a bearish outlook on the dollar due to various factors, such as:

  • The U.S. fiscal and monetary policies may increase the money supply and lower the interest rates, leading to inflation and currency depreciation.
  • The U.S. trade and current account deficits may reduce the demand for the dollar and increase its supply in the foreign exchange market, leading to currency devaluation.
  • The geopolitical and economic risks may reduce the confidence in the dollar and its role as a safe-haven currency, leading to currency sell-off.
  • The relative strength or weakness of other currencies that may appreciate or depreciate against the dollar, leading to currency fluctuations.

For investors who want to profit from a decline in the value of the dollar, one option is to use short-dollar ETFs.

Advertisement

What Are Short Dollar ETFs?

Short dollar ETFs are exchange-traded funds (ETFs) that seek to provide the opposite return of the U.S. dollar. They use futures contracts and swaps to gain exposure. Some short dollar ETFs bet on the strength of other currencies, such as the euro, the Swiss franc, the Canadian dollar, or the Japanese yen. Others bet directly against the dollar by shorting a basket of world currencies.

Short dollar ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short. Shorting involves borrowing securities and selling them with the hope of repurchasing them at a lower price later. Shorting can be risky, costly, and complicated, as it requires a margin account, a stock loan fee, a high level of market timing, and risk management skills.

Short dollar ETFs are simpler and cheaper than shorting currency or futures contracts directly. They are also more liquid and transparent than other currency products, such as mutual funds or certificates of deposit (CDs). They can be traded on major stock exchanges like any other ETF.

How Do Short Dollar ETFs Work?

Short dollar ETFs work by using derivatives, such as futures contracts and swaps, to create a synthetic short position on the dollar. A futures contract is an agreement to buy or sell an asset or security at a set time and price in the future. A swap is an agreement to exchange cash flows based on different underlying assets or indices.

Advertisement

For example, suppose an investor wants to bet against the U.S. Dollar Index (DXY), which measures the value of the dollar against a basket of six major currencies: euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%). The investor can buy a short dollar ETF that tracks the inverse performance of the DXY.

The short dollar ETF will use futures contracts and swaps to sell the DXY and buy its components in proportion to their weights in the index. If the DXY falls by 1%, the short dollar ETF will rise by 1%, minus fees and commissions. Conversely, if the DXY rises by 1%, the short dollar ETF will fall by 1%, plus fees and commissions.

What Are Some Examples of Short Dollar ETFs?

According to ETF Database, there are currently 29 short dollar ETFs available in the U.S., with different levels of leverage (-1x, -2x, or -3x) and different target currencies or indices. Some examples are:

  • Direxion Daily USD Currency Bear 3x Shares (USDU): This ETF seeks to deliver 3x the inverse daily performance of the MSCI US Dollar Currency Index.
  • ProShares UltraShort USD (UUP): This ETF seeks to deliver 2x the inverse daily performance of the MSCI US Dollar Currency Index.
  • Invesco CurrencyShares DB US Dollar Index Bearish Fund (DXY): This ETF seeks to track the performance of the inverse of the Deutsche Bank Liquid U.S. Dollar Index.
  • VelocityShares Daily Inverse USD Currency ETN (DXYSV): This ETN seeks to provide an inverse daily return of the U.S. dollar index.
  • Amundi S&P 500 Short USD Currency Hedged UCITS ETF (AmundiSP500USDHedged): This ETF seeks to track the performance of the MSCI USA Index, hedged to the USD.
  • UBS ETF (UCITS) Bloomberg USD Currency Hedged Short USD (USDH.L): This ETF seeks to track the performance of the Bloomberg USD Currency Hedged Short USD Index.
  • WisdomTree US Dollar Index Bearish Fund (USDD): This ETF seeks to track the performance of the WisdomTree US Dollar Index, which is designed to measure the performance of the U.S. dollar relative to a basket of currencies.
  • Amundi S&P 500 Short USD Currency Hedged UCITS ETF – USD (USDH.S): This ETF seeks to track the performance of the MSCI USA Index, hedged to the USD.
  • SPDR MSCI US Dollar Short Term Futures ETF (UUP.TO)
  • Invesco CurrencyShares DB US Dollar Index Bearish Fund – CAD (DXY.TO)
  • WisdomTree US Dollar Index Bearish Fund – CAD (USDD.TO)
  • Amundi S&P 500 Short USD Currency Hedged UCITS ETF – EUR (USDH.EUR)
  • UBS ETF (UCITS) Bloomberg USD Currency Hedged Short USD – EUR (USDH.EUR.L)
  • SPDR MSCI US Dollar Short Term Futures ETF – EUR (UUP.EUR)
  • Invesco CurrencyShares DB US Dollar Index Bearish Fund – EUR (DXY.EUR)
  • WisdomTree US Dollar Index Bearish Fund – EUR (USDD.EUR)
  • Amundi S&P 500 Short USD Currency Hedged UCITS ETF – GBP (USDH.GBP)
  • UBS ETF (UCITS) Bloomberg USD Currency Hedged Short USD – GBP (USDH.GBP.L)
  • SPDR MSCI US Dollar Short Term Futures ETF – GBP (UUP.GBP)
  • Invesco CurrencyShares DB US Dollar Index Bearish Fund – GBP (DXY.GBP)
  • WisdomTree US Dollar Index Bearish Fund – GBP (USDD.GBP)
  • Amundi S&P 500 Short USD Currency Hedged UCITS ETF – JPY (USDH.JPY)
  • UBS ETF (UCITS) Bloomberg USD Currency Hedged Short USD – JPY (USDH.JPY.L)
  • SPDR MSCI US Dollar Short Term Futures ETF – JPY (UUP.JPY)
  • Invesco CurrencyShares DB US Dollar Index Bearish Fund – JPY (DXY.JPY)
  • WisdomTree US Dollar Index Bearish Fund – JPY (USDD.JPY)

What Are the Benefits and Risks of Short Dollar ETFs?

Short dollar ETFs offer several benefits for investors who want to hedge or speculate on the dollar’s movements, such as:

  • They provide a simple and convenient way to gain inverse exposure to the dollar without having to short currency or futures contracts directly.
  • They offer diversification and risk management benefits, as they can help reduce the currency risk of holding foreign assets or hedge against inflation or deflation.
  • They can enhance returns and generate income in a bearish market or a low-interest-rate environment, as they can profit from the dollar’s decline or pay dividends from the interest earned on the long positions.

Short-dollar ETFs also involve several risks and challenges, such as:

  • They are subject to tracking error, which is the difference between the fund’s performance and its underlying index or benchmark. Tracking errors can be caused by fees, expenses, rebalancing, compounding, market volatility, liquidity, or other factors.
  • They are not suitable for long-term investors, as they are designed to provide daily or monthly returns that may not match the long-term performance of the index or currency they are tracking. The effects of compounding, leverage, and volatility can erode or magnify the returns over time.
  • They are subject to currency risk, which is the risk of losing money due to unfavorable exchange rate movements. Currency risk can be affected by various factors, such as economic conditions, political events, monetary policies, trade relations, or market sentiment.
  • They are subject to leverage risk, which is the risk of losing more than the initial investment due to the use of borrowed funds or derivatives. Leverage can amplify the gains or losses of the fund, making it more volatile and risky.

In conclusion, Short dollar ETFs are exchange-traded funds that seek to provide the opposite return of the U.S. dollar. They use futures contracts and swaps to gain exposure. They can be useful for investors who want to hedge or speculate on the dollar’s movements, but they also involve various risks and challenges. Investors should understand how short-dollar ETFs work, what are their benefits and drawbacks, and how they fit into their overall portfolio objectives and risk tolerance.

Frequently Asked Questions (F&Qs)

Is there an ETF to short the dollar?

Yes, there are a few ETFs that allow you to short the dollar. Here are a few examples:

  • Direxion Daily USD Currency Bear 3x Shares (USDU): This ETF seeks to deliver 3x the inverse daily performance of the MSCI US Dollar Currency Index.
  • ProShares UltraShort USD (UUP): This ETF seeks to deliver 2x the inverse daily performance of the MSCI US Dollar Currency Index.
  • Invesco CurrencyShares DB US Dollar Index Bearish Fund (DXY): This ETF seeks to track the performance of the inverse of the Deutsche Bank Liquid U.S. Dollar Index.
  • VelocityShares Daily Inverse USD Currency ETN (DXYSV): This ETN seeks to provide an inverse daily return of the U.S. dollar index.

Is there a way to short the US dollar?

es, there are a few ways to short the US dollar. Here are a few examples:

  • Sell US dollar futures contracts: Futures contracts are agreements to buy or sell an asset at a predetermined price on a future date. When you sell a futures contract, you are essentially betting that the price of the asset will fall.
  • Sell US dollar exchange-traded funds (ETFs): ETFs are baskets of stocks or other assets that trade on an exchange. There are a number of ETFs that track the performance of the US dollar, and you can sell these ETFs if you believe that the dollar will decline in value.
  • Buy put options on US dollar futures contracts: Put options give you the right, but not the obligation, to sell an asset at a predetermined price on or before a certain date. When you buy a put option on a US dollar futures contract, you are essentially betting that the price of the dollar will fall.

Are short ETFs safe?

Short ETFs are not inherently safe. They are a type of investment that can be used to profit from declining asset prices, but they also carry significant risks.

What is a short-leveraged ETF?

A short-leveraged ETF is a type of exchange-traded fund (ETF) that uses leverage to magnify the returns of a short position. This means that the ETF will lose money if the underlying asset price rises, but will gain money if the underlying asset price falls.

How do short ETFs make money?

Short ETFs make money when the underlying asset price falls. They do this by using a variety of techniques, including:

  • Short selling: Short selling is when an investor borrows shares of an asset and sells them, with the expectation that they will be able to buy them back at a lower price in the future.
  • Using derivatives: Derivatives are financial instruments that derive their value from another asset. Short ETFs can use derivatives to bet on the decline of an asset price.
  • Leverage: Leverage is when an investor borrows money to amplify their investment. Short ETFs can use leverage to magnify their gains when the underlying asset price falls.

How long can you hold a short ETF?

There is no set limit on how long you can hold a short ETF. However, it is important to note that short ETFs are a risky investment and you should only hold them for as long as you are comfortable with the risks involved.

Advertisement