Ray Hendon

Six Ways to Trade Foreign Currencies

My mistake. The symbol is BZF.

Six Ways to Trade Foreign Currencies

BXF is the trading symbol. It has been actively trading since May 14, 08.

Six Ways to Trade Foreign Currencies

Sam, I haven't made any specific recommendations about individual ETFs or ETNs, except that I own two. The reason I don't make specific recommendations for an investor is that what they buy must depend on what their current exposure to currencies are, among other considerations. For example, granger, in the last comment, has exposure to several European currencies through bond holdings. So, he would not need to have those currency ETFs in his portfolio unless we was shorting them to hedge his bond bets. I simply do not believe that every investor needs to have currency exposure, depending on their attitude about and ability to handle risks.

DBV is a strategy ETF, and I will cover the strategy possibilities in my next post. Note, however, its high expense ratio. Any strategy will come at a cost, so it is a personal questions as to whether the cost is worth it.

Also, I think ETFs and ETNs do properly reflect the small currency movements on a daily basis, depending on how much they trade. It may be some days before the latest price movements are reflected in NAV if the ETF is not trading. But, over the long run, price movements in the currency will be captured.

Granger, good question about proper allocations of currencies to a portfolio. This is not an area that has gained much attention from financial advisors, for currencies as an asset class have not reached critical mass yet, in my opinion. I think that with the new offerings, however, advisors will begin looking more closely at this area.

Six Ways to Trade Foreign Currencies

The expense ratios are important, but with currency funds they are far from the complete story. Also check the bid/ask spreads among the various vendors and the spread between the interest earned and interest paid. Rydex and Wisdom Tree have the lowest ERs, although Elements are also about the same as Rydex. Van Eck is the highest, with a .55% ER. But, recall that ETNs all have futures to buy, and the costs of futures are not included in the overall expense ratio.

In terms of tax implications, the interest earned on ETFs and ETNs is taxable for the year in which it is either paid or declared. But, with ETFs, you at least get the dividends. With ETNs they are added to the total value of your investment but are not paid our. You must sell the shares to capture them, and you must pay the tax on them even though they are not paid out. To me, this gives an edge to ETFs.