Currency traders utilize foreign currencies and currency exchange traded funds (ETFs) in a number a ways. One of the more popular ways of gaining a profit through currency trading is by betting on “carry trade.”
The carry trade works like this: traders sell the currencies of countries with low interest rates while buying the currency of countries with higher rates. You can find current rates here.
The logic is that, over time, high-interest rate currencies will appreciate against low-rate currencies. For instance, the most popular trade of the day involves selling the low-yielding U.S. dollar and buying the high-yielding Australian dollar. Essentially, if you build a position in the Australian dollar, you would borrow the U.S. dollar at U.S. rates and get paid at a higher Australian rate. [ETF Trends’ Guide to Currency ETFs.]
The carry trade is tricky, which is why ETFs may be an appealing option for many investors who don’t have the time, energy or stomach for the foreign exchange. The two funds below use strategies similar to the carry trade in a convenient, low-cost, transparent format:
- PowerShares DB G10 Currency Harvest (NYSEArca: DBV)
- iPath Optimized Currency Carry ETN (NYSEArca: ICI)
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.