Making Money Alert
ETF Talk: The Strong Taste of the Swiss Franc
08/10/2011
The Swiss franc so far this year has been a welcome refuge from a variety of international economic and debt-related woes. The currency has given investors a rare safe haven from the ravages of debt in other countries. The best part about the Swiss franc is that you don’t need to be a professional trader to buy the currency. One simple way to play this trend is through an exchange-traded fund, the CurrencyShares Swiss Franc Trust (FXF).
The fund’s performance this year is impressive, with a year-to-date return of 28.73% as of Aug. 9. Such returns far outstrip the paltry performance of markets in the United States and virtually everywhere else.
The ascent of FXF is drawing interest to the fund. The fund received a net inflow from investors of $292.2 million in the two weeks between July 27 and Aug. 9, amid the contentious debt-ceiling debate in Washington and the Standard & Poor’s downgrading of the U.S. government’s credit rating. With total assets of $1.4 billion as of Aug. 9, the fund’s recent inflow is significant and leaves no doubt about the growing popularity of FXF. The following chart provides definitive proof.
With the U.S. government printing more and more money, while accumulating an increasingly alarming amount of debt, investors understandably seem attracted to the strength of the Swiss currency. FXF offers a way for U.S. investors to protect a portion of their savings from the weakening U.S. dollar.
One cautionary note is the role that the Swiss central bank recently played in regulating the nation’s currency. Just two weeks ago, the central bank raised interest rates in an apparent attempt to rein in the currency’s appreciation.
As investors around the world seem to be running for the Swiss Alps, Switzerland’s central bank is trying to prevent the rising value of its currency from affecting the Western European country’s economy. A strong currency, compared to Switzerland’s trading partners, can hurt its exports and put a strain on domestic businesses. Another concern is that the Swiss franc could be overvalued and due for a pullback at some point.
Intervention in the markets by central banks always causes volatility and raises questions about what might happen next. So, if the Swiss franc continues to appreciate, do not be surprised by further moves from Switzerland’s central bank to slow down the trend. FXF is an ETF that you may want to own if you are willing to risk Swiss central bank intervention and are more afraid of the debt problems in the United States and in a variety of European countries.
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