Currency Diversification With ETFs

|
 |  Includes: CEW, FXA, FXC
by: Tom Lydon

Currency ETFs haven't exactly been a huge hit yet and forex trading is a notoriously difficult endeavor. However, currency ETFs are an easy way to diversify away from the U.S. dollar.

For example, there are countries with stronger economic growth and less debt than the U.S. and some other developed economies.

"The Federal Reserve's misguided insistence on a loose monetary policy, ongoing resistance to government spending cuts, and another increase in the U.S. debt ceiling will all conspire to boost inflationary pressures and restrain the value of the U.S. dollar. That will, of course, impact domestic market performance and cut into real returns on dollar-denominated investments - but it will also provide major opportunities for U.S. investors who can target issues denominated in the strongest foreign currencies," Larry D. Spears wrote for Money Morning.

Investors who want to diversify away from the U.S. dollar with stronger foreign currencies could consider the following ETFs:

  • The Australian dollar is driven by natural resources from the land down under. From precious metals to industrial minerals, Australia is known as a proxy for a commodity play. China is also Australia's biggest natural resource customer, so with the rebound of the Chinese economy, Australia's economy is expected to prosper. The CurrencyShares Australian Dollar Trust (NYSEARCA:FXA) tracks the Aussie dollar against the U.S. dollar. The Aussie dollar was recently flirting around a key resistance level.
  • Another resource-rich economy, Chile is known as one of the top exporters of copper. Analysts such as JP Morgan anticipate that copper will be the most in-demand metal in the coming years, due to improving global growth. The WisdomTree Dreyfus Emerging Currency Fund (NYSEARCA:CEW) gives exposure to the Chilean peso at 8.3%.
  • A strong Canadian dollar is expected in 2013 due to many factors. Canada's strong banking system, small budget deficit, and plethora of natural resources are all contributing factors to the overall health of the currency. Guggenheim CurrencyShares Canadian Dollar Trust (NYSEARCA:FXC) is a way to play the Canadian dollar against the U.S. dollar, with the slowdown in the U.S. economy the major risk factor.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates.