Currency ETFs for Diversification
July 17th at 12:30pm by Tom Lydon
Compared to the equities and fixed-income markets, the Forex currency market seems to have a mind of its own. For a well diversified portfolio, foreign currency exchange traded funds provide an alternative asset with a lower correlation to traditional assets.
So far this year, the average price share for currency funds dipped 2.4%, including a 0.8% depreciation in the month through Thursday, and the average annual performance over the last five years is a slightly negative 0.3%, reports Daisy Maxey for the Wall Street Journal.
Barry Young, a Houston-based private wealth adviser with UBS Wealth management, though, uses currency investments as a way to diversify away from the risks inherent in stocks.
For instance, Young explains that he invests as much as 10% to 20% of a client’s cash allocation in foreign-currency investments or hard assets as these investment categories typically do not move in unison with stocks and bonds.
Moreover, Young points out that as central banks become more aggressive with their monetary policies, there are more opportunities to capitalize on. [A Forgotten ETF Victim of the Strong Dollar]
“Asset prices are not reflecting fundamentals these days, but more so where the next major policy movement–monetary or fiscal–will be,” Axel Merk, manager of the Merk Hard Currency Fund (MHCIX), said in the article.
Moreover, currency funds could help maintain better stability in a rising rate environment.
“The next wave of problems could be related to rising interest rates and currency funds could be more resilient,” Rodney Wade, president of Wade Financial Advisory, said in the article.
ETF investors can choose from a number of country-specific currency ETFs or hold a diversified currency play. For instance, the PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP) provides long USD exposure to the euro, yen, pound sterling, Canadian dollar, krona and franc. On the other hand, something like the PIMCO Foreign Currency Strategy ETF (NYSEArca: FORX) would benefit from a weaker U.S. dollar, investing in currencies from Canada, Norway, Russia, Sweden, Brazil, Mexico, China, New Zealand, Australia, Malaysia, Chile, Switzerland, South Africa, Poland, Singapore, Indonesia and India. [King Dollar Has Hit These Sector ETFs]
For more information on world currencies, visit our currency ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.