One reader wanted to know about foreign currency exchange traded funds (ETFs). Thanks to ETFs, foreign currency is a market the average, everyday investor can get exposure to an area that previously wasn’t accessible to them.
The rise and fall of currency has a lot to do with several factors, according to George D. Lambert for Investopedia. The value is impacted by economic growth, government debt levels, oil and gold prices, and more.
Just look at what happened recently in the United States: gross domestic product (GDP) slowed, government debt rose, oil and gold prices spiked. Suddenly, our dollar was hitting record lows against the yen and euro.
Currency ETFs replicate the movements of the currency in the exchange market either by holding currency cash deposits in the currency that’s being tracked, or by using futures contracts on the underlying currency.
Currency ETFs can either track the specific currency you’d like, or a group of them, as in the case of the DB G10 Currency Harvest Fund (DBV).
How they operate is cut-and-dry: when you sell it, if the currency has appreciated against the dollar, you’ll earn a profit. If the currency has dropped relative to the dollar, it’s a loss. Foreign currency ETFs are bought and sold just like regular ETFs, throughout the day.
Keep an eye on the dollar, though: it strengthened yesterday, reports Madlen Read for the Associated Press. Dropping oil prices and the Dow’s close above 13,000 for the first time since Jan. 3 are viewed as signs of optimism.
The options investors have for currency ETFs have exploded. Among the many choices:
- CurrencyShares Australian Dollar Trust (FXA)
- WisdomTree Dreyfus Brazilian Real Fund (BZF)
- ELEMENTS British Pound (EGB)
- CurrencyShares Swedish Krona Trust (FXS)
Depending on your feeling about the dollar – will it continue to strengthen, or is this just a temporary lift? – there’s also the PowerShares DB US Dollar Index Bearish (UDN) and the PowerShares DB US Dollar Index Bullish (UUP).
Read the disclosure, as Tom Lydon is a board member of Rydex Funds.