Profligate U.S. fiscal and monetary policies have weakened the dollar and strengthened foreign currencies. With the proper application of currency ETFs, an investor may be able to capitalize on foreign markets.
Now that the U.S. dollar has hit nearly a 12-month low, you could be wondering how to best capitalize. Foreign stocks do not offer the diversification of currency investing, since stocks are usually correlated to U.S. equities, remark Katie Benner and Beth Kowitt for CNNMoney.
One way to access foreign tender is through international protected bonds; these are international bonds that offer protection against interest rate risk.
But currency traders can also directly bet on single currencies or or a broad basket of currencies through the use of ETFs. We have compiled a rather comprehensive list of currency ETFs in our currency guide. Currency ETFs are good hedging tools for investors who go long on equity performance of a foreign market while shorting an ETF to protect against currency depreciation.
Not all currency ETFs are created equal, however. John Spence for The Wall Street Journal outlines the various funds and the differences between them:
- Rydex’s CurrencyShares are grantor trusts that hold foreign currencies in overseas interest-bearing accounts. Their value is determined by the movement of their respective currencies vs. the U.S. dollar. All funds have 0.4% expense ratios.
- WisdomTree’s currency ETFs provide exposure to non-U.S. money market securities or rates. The euro and yen funds invest mostly in high-yielding, very short-term investment-grade money market securities denominated in the ETF’s target currency, a Morgan Stanley analyst says.
- Invesco PowerShares has three funds: a bullish dollar fund, a bearish dollar fund and a currency harvest fund that reflects long futures positions in the three currencies with the highest interest rates and short positions on the three with the lowest.
- Barclays has currency exchange traded notes (ETNs), which are debt instruments as all ETNs are. They took a blow in 2007 when the IRS took away their key tax advantage.
Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.
Max Chen contributed to this article.