Currency exchange traded funds have made investing in various currencies easier than before. There is no need to mess with futures, open a forex account or purchase the actual currency to benefit.
If a falling U.S. dollar or a rising Swiss franc is appealing for your portfolio, there are ways to access these movements with currency ETFs. Plus, ETFs are simple to trade, have low fees and expense ratios and are tax efficient. [Is the Swiss Franc ETF Still a Safe Haven?]
A currency ETF mimics the movement of the currency in the exchange market by either holding currency cash deposits in the desired currency, or using futures contracts on the underlying currency, reports Investopedia. [ETF Chart of the day: Dollar, Euro Currency Funds]
- Diversification: Currency ETFs are a simple tool that allows diversification away from the U.S. dollar while tracking the price movements of other major markets. Currently, the choices range from the Aussie dollar, British pound, Canadian loon, Euro, Japanese yen, Swedish krona, Mexican peso and Swiss franc.
- Risk: There are some risks when investing in any currency. Areas of concern are political risk, national debt, trade deficits, interest rate changes, government default, fluctuating domestic and foreign interest rates, central banks or government agencies selling off currencies in large amounts, and commodity price movements.
- Currency Plays: There are other currency ETF strategies that can be accessed through ETFs. For instance, the PowerShares DB G10 Currency Harvest Fund (NYSEArca: DBV) tracks the yield spreads by purchasing futures contracts in the highest yielding currencies in the G10 and selling futures in the three G10 currencies with the lowest yields. [ETF Chart of the Day: Currency Harvest Fund]
Tisha Guerrero 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.