FTSE Group creates global currency unit index for risk-management tool
FTSE Group, the index services provider, on Tuesday launched its Wealth Preservation Unit (WPU), a global currency unit index aimed at protecting investors’ wealth from currency and inflation risk.
The FTSE WPU consists of a basket of 11 developed and emerging market currencies and two commodities, gold and oil. The base date of the index is December 31, 2011, with a corresponding base value of the WPU/USD exchange rate of one. The group has created the index to manage growing concern of the undiversified risk associated with investments in global equities.
“The implicit currency risk of a global equity basket is concentrated in four currencies – US dollar, euro, sterling and yen – with unsustainable deficits and the incentive to monetise this debt,” states FTSE.
“Historically, currencies experiencing such conditions have proved to be a poor long-term store of value.”
The company has said FTSE WPU offers a cheap, alternative solution to managing currency risk associated with developed market investments.
While an alternative way to address currency risk has been to invest more capital into emerging markets and real assets, these can be highly illiquid, volatile and involve large trading costs.
FTSE says investors can benefit from using WPU as a liquid, low-risk tool that has low bid-offer spreads.
The return on the FTSE WPU depends on the currency in which it is measure. Taking the example of the using the WPU to hedge US dollar exposure, while the USD has lost value against the EUR and gold, the WPU has appreciated against the dollar in line with global inflation.
Historic performance of the WPU
The price of the FTSE WPU will be published daily by FTSE and disseminated by data vendors.