Instead of picking out a single currency exchange traded fund (ETF), an ETF that covers a basket of currencies may be a good pick to reduce risk. WisdomTree provides one such currency fund, targeting the emerging markets.
The WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW) accesses “non-deliverable” forward (NDF) exchange contracts, and the fund captures the broad and sudden shifts of investor sentiments in the emerging currencies market, writes Rakesh Saxena for Seeking Alpha.
CEW fund provides access to the short-term money market in the emerging markets without encumbering investors with possible settlement risks. It is noted that only those comfortable with foreign exchange risks should be investing in this type of fund. (More on currency investing in our special report).
Potential traders should also note that NDF contracts incorporate interest rate differentials and speculative orders, which means that during stressful times in the financial markets, the exchange rates available in the NDF market are more accurate than the official quotes from emerging market banks.
NDF contracts are essentially outright forward exchange contracts with profits and losses adjusted between two counterparties based on the difference between the contracted and spot rate on the contract maturity date. (More on forward contracts can be found here).
Why is a basket of currencies beneficial?
- Emerging markets can be volatile; currency basket ETFs can give you broad exposure to a range of currencies and mitigate your overall risk. (More on emerging markets here).
- They are lower-correlating assets. The currencies in emerging markets generally move independently of other domestic investments and alternative asset classes, such as commodities.
- They’re another way to access the overall growth of a currency category; in this case, emerging markets.
- WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW): up 5.9% since inception; currencies include Mexican peso, Brazilian real, Chilean peso, South African rand, Polish zloty, Israeli shekel, Turkish new lira, Chinese yuan, South Korean won, Taiwanese dollar, Indian rupee
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.