Currency Investing – Should You Buy A Currency ETF?

August 8, 2008

Some of you have had some interest in Currency ETFs, so we decided to share with you some more information about them. They have gained popularity over the past two years due to the weakening dollar and the strengthening Euro, British pound, and Canadian dollar. I am not an expert on trading currency. In fact, I’ve never traded currency or currency ETFs, but I’ll share with you my take on them.

What is a Currency ETF?

A currency ETF is just like a big savings account. and it holds cash to invest in banks to gain interest. They became available in 2005 to help the average investor tap into the currency market.

Risk Analysis

The risk involved is very high when trading currency. It’s very volatile, similar to trading commodities. Trading foreign currency relies on the weakening of the U.S. dollar. Betting on the U.S. dollar to continue to weaken shouldn’t be for the long-term. Ultimately, anyone investing in U.S. securities shouldn’t bank on the dollar continuing to weaken. The currency ETF is a good short-term investment if you want to play the marketing timing game. But, as a long-term investment, it’s not a good choice. It’s too unpredictable, and it bets on the U.S economy not to do well, similar to gold and silver commodities.

Strategy

Buying a currency ETF for 6 to 12 months can help offset your losses from a weakening dollar, but don’t expect the U.S. dollar to continue to weaken. Even a small fluctuation in the U.S. dollar can cause you to lose a chunk of cash. Don’t use more than 5% of your portfolio to invest in foreign currency.

My Picks:

  • The British Pound Trust
  • Currency Shares Euro Trust

Those are the only two currencies that I see continuing to strengthen. I wouldn’t bet on Japan or China. They are strong, but their currencies seem to be the most volatile. The Euro has consistently strengthened against the U.S. dollar since its inception.

Erik

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Erik

Erik Folgate is a husband and father living in Orlando who’s been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.


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Comments

8 Responses to Currency Investing – Should You Buy A Currency ETF?

  • ToughMoneyLove

    To take advantage of currency fluctuations (namely a falling dollar), you should consider instead a non-hedged foreign treasury bond fund as part of a comprehensive asset allocation.

  • market folly

    i’m sorry to be blunt but recommending the euro is a horrible idea considering that trichet and the ecb have just changed their hawkish stance to a policy that is more concerned about slowing growth rather than inflation: ie they now most likely will cut rates just like the US has just finished doing….. hence the massive drop in the euro this past week.

  • Shadox

    I wouldn’t bet against the Dollar, for a couple of reasons. So far the current economic weakness has mostly centered on the U.S. – well, there are signs that it is exapnding globally. With that, many central banks are expected to lower interest rates, and this is expected to make the Dollar more attractive.

    But that’s the macro economic answer. Here’s the real story: if you are earning in U.S. Dollars, and spending in U.S. Dollars, betting on foreign currency is nothing more than speculation. It is no different from betting on the stock market. If you are hedging a specific currency risk (for example – you plan an international trip and buy that country’s currency in advance to protect yourself against exchange rate fluctuations) that’s fine. Otherwise, forget about betting on exchange rates.

  • Jerry

    That market is a little too volatile for me at the moment (investments have no insurance, you know!), but it is very intriguing in concept and leads me to think about currencies often. We are about to move to Europe for a few years, and the dollar is taking it on the chin. I hope you are correct about it regaining some strength against the Euro! That would help our expenses a lot…
    Jerry

  • Taddy

    Excellent content – as you always provide and inspires me to come again and again.

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