ETFs Simplify Currency Investing

ETFs dealing in currencies have given investors exposure to this area of the market that was previously a challenge to gain access to.

Many investors, however, lack familiarity with the mechanics of the currency markets, reports Don Dion for Fidelity Adviser. What makes a currency strong or weak? Is a strong dollar a good or bad thing?

You may have noticed the dollar gained ground last week, but is this momentum going to continue? There are several factors that will affect the movement of the dollar, but the most important is the interest rate that the Federal Reserve sets up every six weeks. Remember that higher rates support a strong dollar, and lower interest rates give way to a weaker dollar.

The rate cuts of 2007 have been on hold and if the economy can gain a foothold and stabilize along with a strong employment outlook for a few quarters, then expect the Fed to raise the key Federal funds rate from its current level of 2.0%, giving way to a stronger U.S. dollar.

When the dollar loses value, it affects things in a different way: U.S. goods become more competitive in the global marketplace and commodities denominated in dollars (such as oil) tend to go up in price. It’s a simple matter of the exchange rate.

For the time-being, though, the only major currency on an uptrend is our very own greenback.

Meanwhile, WisdomTree is getting set to launch a new currency fund for emerging markets. The Emerging Currency Fund (CEW) is set to launch toward the end of September, reports Ray Hendon for Seeking Alpha. WisdomTree’s line of single-currency funds that launched earlier this year are classified as actively managed by the SEC, and from the sound of it, this will be actively managed, too.

The fund will be a basket of up to 12 currencies and as few as eight, depending on what the fund manager deems necessary. Currently, there are 10 currencies in the fund, many of which offer new exposure to ETF investors, including the Polish zloty, Hungarian forint and the Turkish lira. The fund is equal-weighted and will have an expense ratio of 0.55%.

Currency-focused ETFs:

• Market Vectors Double Short Euro (DRR), up 23.6% since May 22 inception
• CurrencyShares Euro Trust (FXE), down 4.2% year-to-date
• PowerShares U.S. Dollar Bullish (UUP), up 4.3% year-to-date
• WisdomTree Dreyfus Brazilian Real (BZF), down 4.2% since May 22 inception

Full disclosure: Tom Lydon’s clients own shares of UUP.

Comments

[doctordoom:]

Why not just buy currencies to hedge you investments and not as an assset class or naked trading vehicle? Someone enlighten me, for I am a neophyte.
Sleepless in San Francisco

2008 Sep 14 10:55 AM