TY - JOUR T1 - Currencies and Currency ETFs JF - ETFs and Indexing SP - 130 LP - 138 VL - 2006 IS - 1 AU - Bilal Hafeez Y1 - 2006/09/21 UR - http://guides.pm-research.com/content/2006/1/130.abstract N2 - The recent launch of numerous currency-based ETFs, and the expected launch of more, has thrown the spotlight on the potential for currencies and currency-based ETFs to enhance portfolio returns. We believe the prevalence of underfunded pension plans increases the chances of pension crises over the next few decades. This may be particularly relevant for pension funds, many of which may be underfunded and in need of better matching their assets and liabilities, possibly by using asset classes other than equities and bonds. Numerous approaches have been proposed to address the issue, including better matching of assets to liabilities by using fixed-income products, the use of derivatives and of alternative asset classes. Foreign exchange has often been viewed as an alternative asset class, rather than as a comparable asset class to bonds and equities, due in part to the absence of a widely followed benchmark and ignorance of the return characteristics of FX. We feel that foreign exchange should be viewed as an asset class similar to bonds and equities. It has exhibited long-term systematic returns or “beta” which are comparable, if not better, than both bonds and equities since 1980. It also has greater liquidity than both. Our work suggests that for global portfolios to benefit the most from foreign exchange, allocations to FX should be in the order of 20%-30%. In that way, the quality of returns can be significantly enhanced, not least by considerably reducing the duration and magnitude of phases of returns underperformance. ER -