ETF Update: Currency ETFs, Investing in Single Countries, Implications of the China ETF Rally

One reader wanted to know about foreign currency ETFs. Thanks to ETFs, the average, everyday investor can get exposure to this area, which previously wasn't accessible to them.

The rise and fall of currency has a lot to do with several factors, according to George D. Lambert for Investopedia. The value is impacted by economic growth, government debt levels, oil and gold prices, and more.

Just look at what happened recently in the United States: GDP slowed, government debt rose, oil and gold prices spiked. Suddenly, our dollar was hitting record lows against the yen and euro.

Currency ETFs replicate the movements of the currency in the exchange market either by holding currency cash deposits in the currency that's being tracked, or by using futures contracts on the underlying currency.

Currency ETFs can either track the specific currency you'd like, or a group of them, as in the case of the DB G10 Currency Harvest Fund (DBV).

How they operate is cut-and-dry: when you sell it, if the currency has appreciated against the dollar, you'll earn a profit. If the currency has dropped relative to the dollar, it's a loss. Foreign currency ETFs are bought and sold just like regular ETFs, throughout the day.

Keep an eye on the dollar, though: it strengthened yesterday, reports Madlen Read for the Associated Press. Dropping oil prices and the Dow's close above 13,000 for the first time since Jan. 3 are viewed as signs of optimism.

The options investors have for currency ETFs have exploded. Among the many choices:

• CurrencyShares Australian Dollar Trust (FXA)
• WisdomTree Dreyfus Brazilian Real Fund (BZF)
• ELEMENTS British Pound (EGB)
• CurrencyShares Swedish Krona Trust (FXS)

Depending on your feeling about the dollar - will it continue to strengthen, or is this just a temporary lift? - there's also the PowerShares DB US Dollar Index Bearish (UDN) and the PowerShares DB US Dollar Index Bullish (UUP).

How to Invest in Single-Country ETFs

ETFs that track a single country have have been a boon to many long-term investors. They allow investors to reduce their exposure to specific regional disruptions, such as the recent credit crunch, and they up the exposure available to countries that are profiting more than the United States or other distressed nations.

Global growth has been outpacing that of the United States for some time now. Evidence of this can be seen just by looking at the performance of the S&P 500: year-to-date, it's down 5%. Its five-year average return is 10.6%, and the ten-year average is 3.9%.

Investors can't be blamed for considering looking abroad for places to put their money. Single-country funds offer more flexibility than mainstream equities, says Alan Farley for The Street.

Overnight gaps that can occur in single-country ETFs can subject them to volatility.

iShares MSCI Mexico (EWW) is an example, as it fell nearly 3% on April 25 because of weak earnings from America Movil (AMX). However, over the past decade, EWW has benefited from Mexico's steady growth in the last decade. Year-to-date, the fund is up 3.6%.

Other ETFs with a strong year-to-date performance include iShares MSCI Brazil (EWZ),which is up 12% and has an annualized return of 55.4% over the last five years; iShares MSCI Taiwan Index (EWT),up 10.2% so far this year, with an annualized return of 18.6% over the last five years.

Brazil was upgraded yesterday by Standard & Poor's to "investment grade."

These uptrends over time with single-country ETFs are all well and good (hindsight is 20/20, right?), but what if you had bought Brazil in November and sold it in January? You would have been down 50%.

But each single country needs to be evaluated on its own merits. Not all of them are going to go up. When it comes to these funds, educate yourself and monitor the trends closely. Have your sell points set for each, letting it go when it either drops below its 200-day moving average or 8% off its high.

If you stick to the plan, hopefully you will achieve your goal of doing well on the uptrends while avoiding the volatility that occurs from time to time.

Does The China ETF Rally Signal Things To Come?

So far in 2008, it seemed as though China and its related ETFs were yesterday's news.

After all, the iShares FTSE Xinhua/China 25 Index (FXI) is down 7% this year, while the SPDR S&P China (GXC) is down 9.6%.

But with a recent burst of activity that began last week, many investors are wondering if China's recent corporate gains are going to start growing again. Since April 21, FXI is up 6.3%, while GXC is up 7.2%.

Since Dec. 31, the Shanghai index has corrected 45%, says Joanne Von Alroth for Investor's Business Daily.

China's economy is enjoying a multi-year boom with huge economic growth. Some thought the good times would continue this year as the country plays host to the Beijing Summer Olympics.

But political unrest over China's actions in Tibet, inflation, bad weather and China's poor environmental record threw the ETFs into reverse.

Chinese government officials refuse to accept a slowdown for long. Officials cut the stamp tax rate - tax on the purchase or sale of stocks - from 0.3% to 0.1%. Institutional investors buying or selling 100,000 or more shares are now required to do it privately to reduce volume moves.

These moves kicked off the rally that has lasted into this week. Whether it will stick is open to debate, but if China begins to head lower, have your exit strategy in place.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds. For full disclosure, Tom Lydon's clients own shares of FXI.

Comments

[ChBobII]

No need to be upset over the economic decline of the USA when there are tools like this to hedge against the decline and even profit as so much else goes bad around us.

[tradealarm]

BZF delisted