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ETF Securities – Best Currency ETF Management Firm & Most Innovative European ETP Provider

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Currency exchange traded products (ETPs) are at the cutting edge of the investment landscape. The currency market is the largest and most liquid in the world, and many investors look to currencies to diversify multi-asset portfolios, generate alpha and hedge currency risk. "While investors have traditionally used forwards, futures, options and CFDs to trade currencies, 2016 saw a number of new investors and an increasing level of activity in the Currency ETP space," says Townsend Lansing (pictured), head of ETCs, ETF Securities.

"Currency ETPs offer investors the opportunity to directly trade currency pairs, such as the EUR/GBP and USD/GBP. Investors can also use them to trade a basket of currencies, such as gaining exposure to the USD against a trade weighted group of its currency counterparts. Elevated levels of volatility in currency markets linked to Brexit and other events have led investors to increasingly utilise currency ETPs, with our range seeing large inflows coming from institutional investors for the first time," Lansing explains. "For example, one client used USD180 million of currency ETPs to go short the GBP against the Euro ahead of the Brexit vote while another used USD100 million to short USD against the Euro to hedge fixed income exposures."

"Clients use our currency ETPs for a variety of reasons: they may not have the infrastructure or mandate to trade currencies directly or they may find ETPs more suited to use over a number of portfolios due to their tradability," Lansing says.

Although the currency ETP client base is primarily dominated by retail intermediaries and private banks, looking forward, Lansing believes that institutional use of ETFs will increase but remain sporadic. "Structurally, our FX products are very good for a wide variety of investors, but large institutions that can access FX markets directly via futures, forwards and swaps may continue to prefer those options."

Lansing predicts, however, that there will be more opportunities for institutional investors to use currency ETPs as a result of regulatory changes. The European Market Infrastructure Regulation (EMIR), which comes into effect in March 2017, will require investors to pay variation margins for over-the-counter FX swaps. The operational requirements behind such a change may make ETPs more attractive, since they don't require any margin payments.

"In both 2015 and 2016, elevated levels of volatility in currency markets prompted a surge of interest in currencies, which in turn, resulted in inflows into products that provide currency exposure. Last year marked one of the fastest growing for the firm and so far 2017 is looking to be a growth year as well, with net inflows up USD400 million by mid-February," says Lansing. 

Interest in ETPs that include a currency hedge has been on the rise as well. "For example, in addition to investing directly in currency pairs, an investor who wants to buy oil but is worried about the accompanying USD risk can benefit from currency hedged oil ETP that helps to mitigate the inherent currency exposure. In the past two years alone, we have seen over USD500 million of inflows into our extensive range of currency-hedged commodity products," explains Lansing. 

"Overall, there is no doubt that currency volatility is on the rise. We believe that 2017 will continue to be an interesting time for this asset class as investors are deciding to hedge currency risk, either by buying currency-hedged ETPs or by investing directly in currency ETPs".

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