In a low-yield world, actively managed currency exposure remains a source of return. A new ETF aims to deliver the goods.

First Trust Global Portfolios has launched what it says is the first actively managed foreign exchange ETF in Europe, designed to appeal to investors anxious to manage forex risks and earn returns in a low-yield world.

The First Trust FactorFX UCITS ETF, which is available on the London Stock Exchange, will hold a basket of between 20 to 30 currency pairs in developing and emerging markets through forward FX contracts, futures, money market instruments and short-dated sovereign debt. The Irish-domiciled UCITS ETF is denominated in US dollars and has a total expense ratio of 0.75 per cent. (The fund isn't based on some sort of index, as is the case with many ETFs; ETFs are units traded on exchanges by market makers. Units are created by authorised participants.)

The exchange traded fund is targeted at wealth managers, discretionary fund managers, advisors and institutional investors. It applies two drivers of return – value and momentum – to the trades made in the world’s $5 trillion-per-day currency market. The ETF will be “long” on undervalued currencies and higher-yielding currencies, and “short” on overvalued, lower-yielding currencies. These positions aim to profit through the yield differential. It also seeks exposure to currencies displaying positive momentum – and avoid those where momentum is negative.

The ETF is pitched at the sort of investors comfortable with global fixed income, who want to manage foreign currency risk, and for whom current ways of managing such risk have become expensive, Derek Fulton, chief executive at First Trust Global Portfolios Limited, told WealthBriefing.

The ETF adopts a systematic approach, holding short term bonds and money market instruments around the world. The base currency of the ETF is in dollars, he said. 

His colleague, Leonardo Da Costa, argued that forex should be treated as an asset class, and a highly liquid one. “Our new fund offers investors a way to capture international yield differentials while potentially managing currency volatility without taking on credit or duration risk,” he said. 

“We have always believed in the principles of active management, but our philosophy has been to establish a non-discretionary, systematic and rules-based approach and this quantitative investment strategy has proved popular across our product range,” Da Costa added.