Currencies once were the domain of the big-time investors, or were considered "too risky," but exchange traded funds (ETFs) have made it easy for regular investors to get in on them, too.
These are interesting times for currency ETFs, says David Bogoslaw for BusinessWeek. The dollar was on a downtrend until recently, when it began showing some strength against the euro and other currencies.
The Federal Reserve’s rate cuts and speculation that economic recovery in the United States might be speedy have had a hand in the recent performance. However, investors will still be concerned with reducing their exposure to U.S. equities and Treasury bonds and currency ETFs will attract interest.
Rydex Investments offers eight currency-focused ETFs, called CurrencyShares. They’re structured as grantor trusts that hold the underlying currency and gain or lose value based on exchange rates and any overnight interest accrued.
Some believe that the euro has reached its limit, especially since European central banks are considering their own rate cuts. So, investors who want to take advantage of any potential rise in the dollar can do that, too: through either the Rydex Strenthening Dollar 2x Strategy H (RYSBX) or the PowerShares DB US Dollar Index Bullish (UUP) or by shorting the CurrencyShares.
The world’s economies really seem to be at a crossroads and it’s anyone’s guess which way various currencies will swing. If trying to predict any one of those movements is too daunting, a diversified currency ETF, such as the PowerShares DB G10 Currency Harvest (DBV). The fund goes long on futures of three currencies with the highest interest rates and short on those with the lowest.
Whatever route you take, currencies work best in a well-diversified portfolio. Don’t put all your currency in one basket.
Read the disclosure, as Tom Lydon is a board member of Rydex Funds.