Currency Diversification in High-Yield Portfolios: Leveraging Stability from FXC

In an era marked by macroeconomic uncertainty and shifting correlations between traditional asset classes, investors are increasingly seeking tools to enhance diversification while maintaining income stability. Currency ETFs, such as the Invesco CurrencyShares Canadian Dollar Trust (FXC), have emerged as compelling instruments for this purpose. By offering exposure to foreign exchange markets with the simplicity of an ETF structure, FXC provides a unique blend of income generation and diversification benefits, particularly for high-yield portfolios navigating a permacrisis environment [1].

The Case for FXC: Stability in a Volatile Landscape

FXC’s appeal lies in its predictable monthly distributions, which have averaged $0.046 per share in 2025, with a forward annualized yield of approximately 1% [3]. While its total return over the past year has been negative (-1.14%), the fund’s static portfolio of Canadian dollars and its low expense ratio (0.40%) position it as a cost-effective tool for hedging currency risk or capitalizing on macroeconomic trends [5]. For instance, the recent distribution of $0.0316 in September 2025 underscores its resilience despite broader market headwinds [3].

Critically, FXC’s performance is uncorrelated with equities and bonds, a trait that becomes increasingly valuable as traditional diversification models falter. BlackRock highlights that the once-reliable negative correlation between stocks and bonds has eroded, necessitating alternative allocations to non-traditional assets [3]. Currency ETFs like FXC fill this gap by offering liquidity and simplicity, enabling investors to hedge against exchange rate fluctuations without the complexities of direct forex trading [5].

Broader Strategic Implications

Beyond individual instruments, currency diversification strategies are evolving to incorporate multi-asset approaches. The Absolute Return Currency Strategy (ARCS), for example, leverages carry, value, and trend factors in currency markets to generate low-correlation returns. Over the past five years, ARCS has demonstrated resilience during market turbulence, such as the 2022 downturn, by capitalizing on widened interest rate differentials and valuation spreads between G10 currencies [2]. Such strategies align with the broader goal of enhancing risk-adjusted returns in high-yield portfolios.

However, investors must balance these opportunities with the inherent risks of forex markets. As J.P. Morgan notes, currency movements can dominate returns in fixed-income and low-volatility portfolios, necessitating careful hedging decisions [1]. For equities, unhedged exposures may be more tolerable, but high-yield portfolios—often reliant on stable cash flows—require a nuanced approach to currency exposure. FXC’s static structure and monthly distributions offer a middle ground, mitigating operational complexity while preserving income predictability [5].

Challenges and Considerations

While FXC and similar instruments present clear advantages, they are not without caveats. The forex market’s 24-hour operation and zero-sum nature mean that gains in one currency often come at the expense of another. Additionally, the fund’s negative average annual return (-0.46% since inception) underscores the importance of viewing FXC as a diversifier rather than a standalone income generator [3]. Investors must also weigh hedging costs against potential benefits, particularly in active strategies where operational demands can erode returns [4].

Conclusion

Currency diversification remains a cornerstone of resilient portfolio construction, especially in a world where traditional asset correlations are unreliable. The Invesco CurrencyShares Canadian Dollar Trust (FXC) exemplifies how currency ETFs can provide stable income and diversification benefits, bridging the gap between simplicity and sophistication. By integrating FXC into a broader multi-asset framework—complemented by strategies like ARCS—investors can navigate the complexities of a permacrisis era while maintaining the income stability critical to high-yield portfolios.

Source:
[1] An FX Hedging Framework for a More Divergent World, J.P. Morgan Private Bank, [https://privatebank.jpmorgan.com/eur/en/insights/markets-and-investing/an-fx-hedging-framework-for-a-more-divergent-world]
[2] Case Study: Absolute Return Currency Strategy, Russell Investments, [https://russellinvestments.com/content/ri/mi/en-gb/insights/russell-research/2024/05/case-study_-absolute-return-currency-strategy--an-underrated-sou.html]
[3] 2025 Fall Investment Directions: Rethinking Diversification, BlackRock, [https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025]
[4] Managing Currency Exposure in Multi-Asset Portfolios, Wellington Management, [https://www.wellington.com/en/insights/currency-exposure-in-multi-asset-portfolios]
[5] FXC - Invesco CurrencyShares Canadian Dollar Trust [https://www.tipranks.com/etf/fxc]