While the forex market is a 24-hour-a-day operation, you can make things easier on yourself by making use of currency exchange traded funds (ETFs). Before you dive in feet first, read up on how currency ETFs work.
First and foremost, currencies are all about relationships.
The euro could depreciate further if Germany doesn’t bail out Mediterranean economies of the Common Market, and the Japanese yen could start to depreciate if its hudge deficit runs out of control, comments Will McClatchy for ETFzone. [Strong Japanese Yen ETF Puts Country in a Quandary.]
European currency-related ETFs include:
- WisdomTree Dreyfus Euro ETF (NYSEArca: EU)
- CurrencyShares Euro Trust (NYSEArca: FXE)
- iPath EUR/USD Exchange Rate ETN (NYSEArca: ERO)
- CurrencyShares British Pount Sterling Trust (NYSEArca: FXB)
- CurrencyShares Swedish Krona Trust (NYSEArca: FXS)
- CurrencyShares Swiss Franc Trust (NYSEArca: FXF)
- iPath GBP/USD Exchange Rate ETN (NYSEArca: GBB)
Japanese yen-related ETFs include:
- CurrencyShares Japanese Yen Trust (NYSEArca: FXY)
- WisdomTree Dreyfus Japanese Yen ETF (NYSEArca: JYF)
Investing in currencies is seen as a short-term strategy, since most currencies cycle in value. More economically turbulent countries experience currency devaluations for longer periods, and the their currencies tend to be more risky and vulnerable to geopolitical changes. [Currency ETF 101: What’s In It for You?]
The iPath Optimized Currency Carry ETN (NYSEArca: ICI) implements active management to carry trade low-yielding currencies that are borrowed and exchanged for high-yielding currencies. The PowerShares DB G10 Currency Harvest Fund (NYSEArca: DBV) is a similar fund that buys futures of three G10 currencies at low rates. Barclays Asian and Gulf Currency Revaluation ETN (NYSEArca: PGD) is an active fund with a regional focus. [Dollar ETFs: Not the Only Falling Euro Plays.]
Other notable currency ETFs include:
- CurrencyShares Australian Dollar Trust (NYSEArca: FXA)
- CurrencyShares Canadian Dollar Trust (NYSEArca: FXC)
- CurrencyShares Mexican Peso Trust (NYSEArca: FXM)
- CurrencyShares Russian Ruble Trust ETF (NYSEArca: XRU)
The alternative to playing currencies elsewhere is to play the U.S. dollar. PowerShares’ two funds buy and sell futures contracts on the dollar and other major currencies.
- PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP)
- PowerShares DB U.S. Dollar Index Bearish Fund (NYSEArca: UDN)
Most currency ETFs are considered debt, so interest proceeds are ordinary income. Gains are taxed at ordinary income rates. You should still consult your accountant about the tax implications of currency ETFs.
For more information on currencies, visit our currency ETFs category.
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.
Max Chen contributed to this article.