Assets: $283 million

Holdings: This fund tracks the interest rates of the U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound, Australian dollar, New Zealand dollar, Norwegian krone and the Swedish krona. DBV looks at the three-month interest rates of the G10 currencies and goes long on the three with the highest rates and short on the three with the lowest.

Objective

The ETF seeks to capitalize on the trend the currencies with high interest rates generally tend to rise in value relative to currencies that have low interest rates. DBV looks at the three-month interest rates of the G10 currencies and goes long on the three with the highest rates and short on the three with the lowest.

What’s Good

DBV gives investors a way to play the carry trade, which is gathering steam after a hiatus.

After developed economies reduced their interest rates to practically nothing, emerging markets with interest rates that are around 12.9% higher now look rather enticing, report Kim-Mai Cutler and Bo Nielsen for Bloomberg.

The Latest News

Goldman Sachs has begun recommending carry trades, which had been on their biggest losing streak in three decades. Thank stimulus plans and near-zero interest rates. In some emerging markets and commodity-rich nations, interest rates are as much as 12.9%, or even higher. From March 20 to April 10, the carry trade saw its biggest three-week gain since at least 1999.

How do currencies traders make a profit off “carry trades?” Well, traders use funds from countries with lower borrowing costs to invest in places with higher rates, and they would then reap in the differences in interest rates. Last year, this strategy was abandoned after volatility, as a result of the central bank policies of individual countries, led to large currency swings.

Typically, people would use dollar, euro and yen to buy up currencies from Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia.

• PowerShares DB G10 Currency Harvest (DBV): up 5.4% year-to-date

Max Chen contributed to this article.

Foreign exchange currency trading is commonly called forex trading. In 2007, the forex market garnered $3.2 trillion dollars worth of transactions each day. This makes the forex market the quiet giant of finance, dwarfing over all other capital markets in its world, explains Kathy Lien and Boris Schlossberg for Investopedia.

When entering the currency market, there are eight major currencies worth trading, which give you the best over- or under-valued opportunities. The eight countries that make up the currency trading market are the United States, the Eurozone (Germany, France, Italy and Spain), Japan, United Kingdom, Switzerland, Australia, Canada and New Zealand.

Some of the key points to currency trading are:

• When trading currencies, yield drives return.
• The forex allows huge leverage; often as high as 100:1 – which means that you can control $10,000 worth of assets with as little as $100 of capital. Remember, leverage works both ways, though.
• Since currency values never stay the same, the carry trade became a popular theory. Carry traders hope to earn not only the interest rate differential between the two currencies, but also look for their positions to appreciate in value.
• Interest rates matter – a lot. Becoming familiar with the economics of the country in which the currency you are trading holds will help you understand when inflation is looming and when opportunity is knocking.

Currency trading is an area of the market that was once inaccessible to most investors. With the advent of electronic trading and the ETF, it has become easy for individual investors to gain access and diversity of this area of the market, the forex.

• PowerShares DB G10 Currency Harvest (DBV): down 2.9% year-to-date; holds a mix of long and short futures positions among 10 currencies: U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound, Australian dollar, New Zealand dollar, Norwegian krone and the Swedish krona.

Carl Delfeld for ETF XRAY has quite a few reasons why he chose the CurrencyShares Japanese Yen Trust (FXY) as his latest pick of the week.

First of all, the Japanese yen is cheap in real trade-weighted terms, and has not seen lows like this since the 1980s. Better yet, Japanese banks are not displaying much correlation with the subprime lending that has taken the rest of the world by storm. Total write-downs by the local banks are at $17 billion, compared to an average of $500 billion around the world.

Although the yen does not have a high yield, it is acting like the other yieldless traditional store of value: gold. Gold hasn’t been serving that purpose very well this year, either. The yen is also the gateway to the “carry-trade” and Japanese retail investors hold positions in commodities and world currencies at around $300 billion.

On the downgrade of American International Group (AIG), the yen touched a two-year high against the euro. It also reached its highest point in five years against the New Zealand dollar, as a drop in stocks encourage investors to reduce their holdings of higher-yielding assets and pay back loans in the yen, report Ye Xie and Bo Nielsen for Bloomberg.

Trang Ho for Investor’s Business Daily also reports that overwhelming fear in the markets right now could also lead investors not just to the yen, but also the Swiss Franc. One analyst expects both currencies to appreciate between 5% and 7%, respectively, over the next two months.

The U.S. dollar could fall further against the yen as investors cover short positions against Japan’s currency.

The CurrencyShares Swiss Franc (FXF) gives exposure.

Also look for safe-keeping with WisdomTree Dreyfus Japanese Yen (JYF). FXY is up 5% year-to-date, FXF is up 0.8%, while JYF is down 1.1% since its May 22 inception.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

The greenback is at a six-month high against the euro on speculation that as the global economy cools off, our currency will heat up, report Ye Xie and Gavin Finch for Bloomberg.

The dollar is on track for its biggest one-month gain since the euro debuted in 1999, and is at an 11-month high against the Australian dollar. It’s also making gains against the New Zealand Dollar, the British Pound sterling and the Swedish krona.

The sharpest advance this month is against the Australian dollar, by 10.1%, while the slowest was 1.4% against the Mexican peso.

The PowerShares DB US Dollar Index Bullish (UUP) is up 0.3% year-to-date, and 5.2% in the last month.

ETFs that could be muscled aside by a stronger dollar include:

• CurrencyShares Australian Dollar Trust (FXA), down 1% year-to-date; down 9.6% in the last month
• ELEMENTS British Pound (EGB), down 6.5% since March 26 inception; down 6.3% in the last month
• iPath EUR/USD Exchange Rate ETN (ERO), up 3.2% year-to-date; down 5.6% in the last month
• Market Vectors Double Short Euro (DRR), up 11.8% since May 22 inception; up 13% in the last month
• CurrencyShares Swedish Krona Trust (FXS), up 2.1% year-to-date; down 4.8% in the last month

For full disclosure, some of Tom Lydon’s clients own shares of UUP.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Take into account the carry trade: it is all about selling currencies at low interest rates and buying currencies with high interest rates, and then the investor benefits from the interest rate spread, reports Matthew Hougan for Index Universe.

PowerShares G10 Currency Harvest Fund (DBV) is an unleveraged ETF that invests in a steady pattern of long-term returns with low correlations to market fluctuations. Since its inception in September 2006, it’s up 8.2%. Year-to-date, it’s down 4.5%.

The index invests in U.S. dollars, euros, Japanese yen, Canadian dollars, Swiss franc, British pound, Australian dollars, New Zealand dollars, Norwegian krone, Swedish krona. The expense ratio is at 0.75%. The volatility is low in this ETF because the index takes long and short positions providing consistent and less volatile returns.

Throughout the year, the weightings of each commodity component in the index naturally changes, based on changes in the underlying futures prices.

ETFs have made it possible for the average investor to get exposure to the world’s currency markets – the largest financial market in the world. Before they came along, investors often had to use futures contracts that involved large amounts of currency.

The first fund launched in late 2005, and it opened up a whole new world for people looking to capitalize on the movements in the foreign exchange.

An excellent article on Investopedia addresses the top issues and questions people might ask about investing in currencies. Among the facts:

• Currencies are not traded on a regulated exchange, there is no central governing body and no arbitration panel to settle disputes. Self-regulation has been very effective, because participants must both compete and cooperate with one another.
• In the foreign exchange market, prices are quoted to the fourth decimal point.
• Technically, you are not buying or selling anything in the currency market. All trades exist as computer entries.
• Currencies are traded in pairs, and when a trade is made, one is always long on one, short on the other.

Not all currency ETFs are created alike. They do track a currency, or a basket of them, from around the world.

Rydex’s line of CurrencyShares are designed to hold cash and invest it with banks to get interest. WisdomTree’s line of Currency Income funds seek to earn current income reflective of the money market rates in the country for which the fund is named. They are not, however, “money market” funds.

ELEMENTS currency exchange traded notes (ETNs) are structured to track the performance of the U.S. dollar vs. the currency named in the fund. For example, if the currency in the fund’s name appreciates relative to the dollar, other things being equal, the value of the fund will increase. Market Vectors currency ETNs give exposure to the exchange rate of foreign currencies.

Note that ETNs differ somewhat from ETFs in their structure as well as tax treatment.

• WisdomTree Dreyfus Japanese Yen (JYF), down 4.8% since May 22 launch
• WisdomTree Dreyfus New Zealand Dollar (BNZ), down 5% since July 8 launch
• CurrencyShares Euro Trust (FXE), up 3.5% year-to-date
• CurrencyShares Mexican Peso Trust (FXM), up 12.2% year-to-date

• ELEMENTS Australian Dollar (ADE), down 3.4% since March 4 launch
• ELEMENTS Canadian Dollar (CUD), down 7.2% since March 18 launch
• Market Vectors Renminbi/USD (CNY), down 2.1% since March 17 launch
• Market Vectors Double Long Euro (URR), down 10.7% since May 22 launch
• PowerShares DB US Dollar Index Bullish (UUP), up 0.2% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of UUP.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Jack Crooks for MoneyandMarkets explains some of the many foreign economic problems that the dollar is rallying against.

Germany, for example, has seen industrial orders drop sharply in June by 2.9%. The International Monetary Fund’s latest forecast calls for lower economic growth in the UK, and predictions have fallen from 1.8% to 1.4% in 2008 and from 1.7% to 1.1% in 2009.

Australia is also battling slow household spending and a financial sector that is facing many challenges. Similarly, the New Zealand Treasury is anticipating a second consecutive quarter of negative GDP growth. This means that after the release of these numbers, New Zealand will have officially entered into a recession.

China also faces some economic obstacles, even as the Olympics have just begun. With air pollution being a big issue, China has forced 105 Beijing factories to close and may have to close down more. Also, many companies face a problem with an overwhelming back up of inventory that was pushed into production to prepare for the Olympic Games. This means growth will be sacrificed for however long it takes to work through this oversupply.

Amidst the many economic problems that countries across the globe are facing, the dollar has rallied, particularly as crude oil prices fall. Crooks reveals the tight inverse correlation between the dollar and oil prices. As oil prices have been sliding, the dollar has gained despite, dismal news from the US economy day after day.

The dollar has been able to continue this rally, even with many different announcements made by the Central Bank. Jack Crooks feels as though it is time to keep the dollar in sight, especially as other economies start to catch the economic bug.

Some have been wondering if the dollar can sustain its run. The concern is that if we prop it up, our goods and services might not be as enticing from a value standpoint. However, new information from overseas seems to indicate that they may be in the fourth or fifth inning of an economic downturn, while we’ve already felt the brunt. Those foreign economies might have to cut interest rates, further propping up the dollar.

The bottom line is: we can tell you five reasons it will go up, and another five reasons it will go down. It’s in an uptrend now, and you can’t fight the trend.

An ETF that is bullish on the dollar is:

• PowerShares DB US Dollar Index Bullish (UUP), down .4% year-to-date, but up 6.1% over the past month.

For full disclosure, some of Tom Lydon’s clients own shares of UUP.

Australians have been tapped out by rising fuel costs and increasing mortgage rates, says Carl Delfeld for ETFXray. Consistent growth still reigns, but there have been some signs of slowing.

Evidence of a hesitant consumer and a sluggish economy is chipping away at the Australian dollar, which has fallen to a three-month low, taking the New Zealand dollar with it. The Reserve Bank of Australia left borrowing costs at 7.25%, reports Ron Harui for Bloomberg. On the news, the New Zealand dollar dropped to its lowest since Sept. 19, while the Aussie fell to its lowest since April 14.

Australia’s central bank showed signs of cutting borrowing costs, a first in almost 7 years. The slower economic growth has helped to stave off inflation. This has been a trend of banks around the world, as bakers try to cushion their economies from slower growth, reports Jacob Greber for Bloomberg.

ETFs that can relate down under:

• iShares MSCI Australia Index (EWA), down 16.1% year-to-date
• CurrencyShares Australian Dollar Trust (FXA), up 7.8% year-to-date
• Australia NETS Trust (AUS), down 11.1% since April 10 inception
• WisdomTree Dreyfus New Zealand Dollar (BNZ), launched on July 8
• Elements Australian Dollar (ADE), up 1.2% since April 4 inception

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Roger Nusbaum for Seeking Alpha has a few examples for investors who may wish to use a currency investment as a proxy for commodities.

His first example is the WisdomTree South Africa Currency (SZR) as a proxy for gold.

But if an investor holds SPDR Gold Shares (GLD), there can be somewhat of a negative correlation. South Africa has a few imbalances and is facing inflation, so the correlation of the two will get better. Instead, Nusbaum suggests CurrencyShares Australian Dollar (FXA). If your portfolio holds Australia already, however, then avoid over-allocation.

CurrencyShares New Zealand Dollar (BNZ) would be a better diversification tool, and many consider the kiwi to be a commodity currency, because of the amount of meat, dairy and wool that is produced in New Zealand. So, rather, BNZ could be an agriculture proxy, and it avoids the volatility of the agriculture funds.

Nusbaum is not suggesting you buy either ETF, he is showing investors how to recognize themes and using other methods to access various asset classes that may not be so obvious.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

According to Simon Maierhofer for ETFGuide, the number of ETF and exchange traded note (ETN) launches is now at an average of 30 per month.

At the end of June, the total number of ETFs stood at 716, while there are nearly 80 ETNs. Factor in the fact that there are more than 450 ETFs and ETNs in registration, and we could be topping the 1,000 mark by the middle of 2009.

In June, 32 new exchange traded products were launched. One of the most notable is the long-awaited carbon credits ETN, the iPath Global Carbon (GRN), which tracks the price of emission credits.

Vanguard launched its first ETF since December 2007, going global with the Vanguard Total World Stock (VT), which goes up against the iShares MSCI ACWI Index Fund (ACWI).

June also saw some new sectors covered, with the launch of the First Trust Global Wind Energy (FAN) and the Claymore/BNY Mellon Frontier Markets (FRN).

PowerShares launched a line of long/short funds covering metals and oil, WisdomTree added to the lineup of currency funds with two new issues covering the South African Rand and the New Zealand Dollar, and Rydex bolstered its lineup of long/short ETFs with funds for energy, financials, healthcare and technology.

For a complete list of all the funds launched in June, take a look at ETF Guide’s story.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.