Currency exchange traded funds (ETFs) just made it easier for every investor to gain access to this corner of the market, one that is important and should not be forgotten about.

Investing in a currency is now cost-efficient and as simple as single stock trading, and the access to foreign markets can add good diversification to a portfolio. PowerShares offers a pair of ETFs that track the fluctuations of the U.S. dollar against the movements of other major currencies.

  • PowerShares DB US Dollar Bullish Index (UUP): down 4.5% over three months
  • PowerShares DB US Dollar Bearish Index (UDN): up 4.6% over three months
  • Kyle Waller for Index Universe reports that UUP and UDN track the same index, the Deutsche Bank U.S. Dollar Index. The Bullish UUP holds a long position of the index, while the Bearish UDN holds short positions in the underlying futures contracts that make up the index.

    As the U.S. dollar gains against other major currencies, UUP will rise. Beware, as values of stocks within a portfolio containing a range of foreign stocks can be negatively impacted. The UUP ETF will track the rise of the dollar against the foreign countries that are invested in. Through UUP, investors can realize the return from a negative currency exchange, and in general, lower the effects of increased volatility for the currency exchanges in their ETFs holding foreign assets.

    But that’s not all – favorable currency exchanges have helped U.S. investors. The return on any foreign asset is equal to the price return plus any fluctuations from currency exchanges.

    When looking to access these foreign markets through ETFs, there are two things to consider:

    • The return from underlying assets
    • The return given by the currency exchange

    Waller notes some exceptions, which include funds that invest in dollar denominated soverign debt.

    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.

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