ETF Expert

Prior to a noticeable uptick in volatility, a simple strategic currency fund endeavored to replicate the ever-popular yen carry trade; specifically, Powershares introduced the G10 Currency Harvest Fund (DBV) at the height of global optimism in late 2006.

Granted, the markets hit new highs a full year later. However, China dropped 10% in a single day in March 2007 as investors scrambled to make sense of the economic fallout. "Subprime" was introduced into the lexicon causing additional market uncertainty. The summer of 2007 was ravaged by a significant correction that abated only after the Fed agreed to adjust its interest rate thinking. In fact, only briefly, did new highs occur on October 9, 2007. What's more, the markets quickly began adjusting to the impending recession that began in December 2007.

It follows that the Powershares DB G10 Currency Harvest Fund (DBV) was introduced as economic uncertainty gathered a head of steam. Yet the idea of shorting low-yielding currencies while taking long futures positions on currencies with the highest interest rates only seems to work in relatively harmonious economic periods.

Unfortunately for DBV investors, investors scampered for stability and protection in 2008, not higher yielding currencies. In so doing, investors chose to put their money in the currencies of the two largest economies — the U.S. dollar and the Japanese yen. Powershares DB G10 Currency Harvest Fund (DBV) investors found themselves with an investment that was stuck shorting an appreciating yen and an appreciating U.S. dollar, while simultaneously being long the faltering currencies of New Zealand and Australia.

I originally felt the Powershares DB G10 Currency Harvest Fund (DBV) was a source of stability in 2007. Yet I was quick to point out the fact that if the yen made a significant move higher, for any reason, the carry trade currency fund DBV would likely struggle. And for me, that problem was solved with stop losses.

(Note: Once you have an investment falling 8%-10% from its highest point, a trailing stop-loss can lock in a large gain, small gain or small loss. Only the big loss can cripple a portfolio.)

So why do I feel that the Powershares DB G10 Currency Harvest Fund (DBV) may indeed have potential yet again? For one thing, it has a nearly perfect indirect correlation with the CurrencyShares Japanese Yen Trust (FXY) at -.90. And that means, if the yen is weakening, DBV is likely strengthening.

In effect, a great deal of the Powershares DB G10 Currency Harvest Fund (DBV) will come down to Japan's success at weakening its currency. With Japan so entirely dependent on its exports, it's going to keep its yen in check through any measure possible. In fact, it's done a pretty solid job over the last 4 months.

With the current U.S. policy of quantitative easing and ultra-low target overnight rates, the PowerShares DB G10 Currency Harvest Fund (DBV) will probably be shorting the yen and the U.S dollar, while going long on Australia, New Zealand and Norway. And it will probably work out just fine.

The only regret here? One might like this ETF to have the ability to go outside the G10. Perhaps it could have gone long the Brazilian "Real" or South African "Rand." Although I am not currently a fan of the WisdomTree Dreyfus currency line-up, one could also consider directly investing in the WisdomTree Brazilian Real (BZF) or the WisdomTree South African Rand (SZR).

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.