Trading currencies may seem like a complex dance around macroeconomic conditions and monetary policies, but currency exchange traded funds can help generate profits and hedge against global swings.
Jim Lowell for MarketWatch believes that currencies provide investors with a glimpse into country, region or global economic cycles, along with a way to trade on economic expansions and contractions.
Currency traders can ride on the wave of rising rates, a positive for the underlying currency, and declining rates, a negative factor. While using the rising and falling rate indicator as a good starting point, Lowell warns that volatility will throw a wrench into normal market conditions.
Moreover, currencies are affected by politics, weather and people, all very unpredictable factors in the markets.
Potential traders have to keep in mind that currencies can’t appreciate indefinitely like a stock as foreign currencies trade in relation to all other currencies. Additionally, currencies typically move in the opposite direction of stocks and bonds, which makes the asset a good diversifier.
Lowell points out the PowerShares DB G10 Currency Harvest ETF (NYSEArca: DBV) as a good way to own a diversified basket of currencies through one instrument. DBV tracks G10 currencies, including the U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound sterling, Australian dollar, New Zealand dollar, Norwegian krone and Swedish krona. The fund also takes a long/short approach, going long currencies with high yields and holding short positions in currencies with low rates.
Going into August, Lowell suggests putting 4.5% in PowerShares Dollar Bull ETF (NYSEArca: UUP), 1.5% in CurrencySHares Japanese Yen (NYSEArca: FXY), 1.5% in CurrencyShares Euro (NYSEArca: FXE), 1.5% in Currency Shares Swiss Franc (NYSEArca: FXF) and 1% in ProShares Short 20-plus Year Treasury (NYSEArca: TBF) as part of a diversified portfolio. [Currency ETFs for Diversification]
For more information on foreign currencies, visit our currency ETFs category.
Max Chen contributed to this article.