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.
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.
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.
- 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.
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