Currency Diversification with ETFs

February 1st at 8:04am 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. [Aussie Dollar Testing Key Resistance on Heavy Volume]
  • 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%. [ETF Spotlight: Emerging Currencies]
  • 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. [Canadian Dollar ETF Strengthens with Stocks]

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.