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Your Ticket To Ride The Falling U.S. Dollar
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FXY, FXE, FXA, FXM, UDN, UUP, INR, CNY, FXF, FXB, FXC, FXS, URR, DRR, PCXFXY, PCXFXE, PCXFXA, PCXFXM, PCXINR, PCXCNY, PCXFXF, PCXFXB, PCXFXC, PCXFXS, PCXURR, PCXDRR
One of the most widely talked about investment themes in the market over the last year has been the decline of the U.S. dollar. As the dollar falls, it will lead to the rise in most foreign currencies. There are certain sectors that benefit from a weak greenback, but, until recently, that was the only opportunity for investors.
With the introduction of the foreign currency exchange-traded funds (ETFs) and exchange-traded notes (ETNs), investors can now invest their money in foreign currency futures and profit from the rise in the euro or Swiss franc. (To find out what ETNs have to offer, and what is at stake, read Exchange Traded Notes - An Alternative To ETFs.)
New Trend
Two years ago there were five currency ETFs available for U.S. investors to choose from, all offered by the Rydex family of funds. Today there are 20 currency ETFs and ETNs traded on U.S. exchanges that give investors exposure to foreign currencies and movements in the U.S. dollar.
Since its peak in 2001, the U.S. Dollar Index has fallen 40% in the seven-year timeframe, and in March 2008 the index hit a new all-time low. The index tracks the movement of the U.S. dollar versus a basket of foreign currencies, rather than a specific currency.
Many believe the U.S. dollar has farther to go on the downside because the government has no intentions of moving toward a strong-dollar policy. I tend to agree the long-term trend of the greenback is lower and the intermediate-term rallies could be used as an opportunity to jump on the weak dollar train. (To learn how these investments can diversify your portfolio, see Venturing Into Non-Dollar Currencies.)
Currency ETFs and ETNs
As the U.S. dollar falls, its foreign counterparts will rally. One of the biggest beneficiaries of the downfall of the greenback has been the euro. My favorite way to play a strong euro is through the Rydex CurrencyShares Euro Trust ETF (PSE:FXE). In 2007 FXE was up 10.7%, not including the dividend which is currently yielding 3.0% annually. The best performing currency ETF in 2007 may surprise you; the Rydex CurrencyShares Canadian Dollar Trust ETF (PSE:FXC) gained 17.4%.
CurrencyShares also offers ETFs for:
PowerShares offers yet another alternative for investors who want to concentrate solely on the U.S. Dollar Index: The US Dollar Index (AMEX:UUP) and another that will move the inverse of the index (AMEX:UDN). Obviously the inverse ETF, PowerShares DB US Dollar Bearish ETF UDN has done much better and is the ETF with the momentum at this time. (These funds can reduce your exposure to market risk, and/or enhance portfolio performance. Read Inverse ETFs Can Lift A Falling Portfolio for more information.)
Leverage Your Currency Exposure
If investing in foreign currencies through ETFs was not enough for you, Van Eck Global as introduced two currency ETNs that will allow investors to leverage their Euro bets. The Market Vectors Double Long Euro ETN (PSE:URR) and the Market Vectors Double Short Euro ETN (PSE:DRR) began trading on May 8, 2008. The ETFs strive to return 200% of the daily moves of the euro, either up or down depending on the ETN chosen. For example, if the euro rises 2% against the U.S. dollar on any given day, ideally URR will rise 4% and DRR will fall 4%. It is simple to figure out the leverage gained through the ETNs. I would consider the two new ETNs trading vehicles to be long-term investments. (For further reading, check out Dissecting Leveraged ETF Returns.)
New WisdomTree Currency ETFs Launching in May
The new ETFs to be launched by the WisdomTree family of ETFs will seek to provide investors income that is reflective of the money market rates available in certain foreign countries. Along with the income the ETF will also seek to provide exposure to the change in value of the underlying foreign currency in relation to the U.S. dollar. Do not be fooled when you read the words "money market"; the ETF will trade intraday and is considered an actively managed ETF by the SEC.
According to the company's press release there are five currency ETFs slated to launch in May 2008. They include: Chinese yuan, Brazilian real, Indian rupee, euro, and Japanese yen.
Why Currencies?
I believe currencies offer a portfolio several advantages. The first is diversification. When the market is volatile like it is now, the more diversification you have the better. Currencies add an asset class that will move independently of U.S. and foreign equities. Investing in foreign currencies also allows investors to hedge their portfolios against what a falling U.S. dollar could do to their holdings. Finally, the trend is for the U.S. dollar to continue falling, why not ride the trend until there are signs it is over? Currency ETFs are your ticket to ride.
With the introduction of the foreign currency exchange-traded funds (ETFs) and exchange-traded notes (ETNs), investors can now invest their money in foreign currency futures and profit from the rise in the euro or Swiss franc. (To find out what ETNs have to offer, and what is at stake, read Exchange Traded Notes - An Alternative To ETFs.)
New Trend
Two years ago there were five currency ETFs available for U.S. investors to choose from, all offered by the Rydex family of funds. Today there are 20 currency ETFs and ETNs traded on U.S. exchanges that give investors exposure to foreign currencies and movements in the U.S. dollar.
Since its peak in 2001, the U.S. Dollar Index has fallen 40% in the seven-year timeframe, and in March 2008 the index hit a new all-time low. The index tracks the movement of the U.S. dollar versus a basket of foreign currencies, rather than a specific currency.
Many believe the U.S. dollar has farther to go on the downside because the government has no intentions of moving toward a strong-dollar policy. I tend to agree the long-term trend of the greenback is lower and the intermediate-term rallies could be used as an opportunity to jump on the weak dollar train. (To learn how these investments can diversify your portfolio, see Venturing Into Non-Dollar Currencies.)
Currency ETFs and ETNs
As the U.S. dollar falls, its foreign counterparts will rally. One of the biggest beneficiaries of the downfall of the greenback has been the euro. My favorite way to play a strong euro is through the Rydex CurrencyShares Euro Trust ETF (PSE:FXE). In 2007 FXE was up 10.7%, not including the dividend which is currently yielding 3.0% annually. The best performing currency ETF in 2007 may surprise you; the Rydex CurrencyShares Canadian Dollar Trust ETF (PSE:FXC) gained 17.4%.
- British pound (PSE:FXB)
- Australian dollar (PSE:FXA)
- Swiss franc (PSE:FXF)
- Japanese yen (PSE:FXY)
- Swedish krona (PSE:FXS)
- Mexican peso (PSE:FXM)
PowerShares offers yet another alternative for investors who want to concentrate solely on the U.S. Dollar Index: The US Dollar Index (AMEX:UUP) and another that will move the inverse of the index (AMEX:UDN). Obviously the inverse ETF, PowerShares DB US Dollar Bearish ETF UDN has done much better and is the ETF with the momentum at this time. (These funds can reduce your exposure to market risk, and/or enhance portfolio performance. Read Inverse ETFs Can Lift A Falling Portfolio for more information.)
Leverage Your Currency Exposure
If investing in foreign currencies through ETFs was not enough for you, Van Eck Global as introduced two currency ETNs that will allow investors to leverage their Euro bets. The Market Vectors Double Long Euro ETN (PSE:URR) and the Market Vectors Double Short Euro ETN (PSE:DRR) began trading on May 8, 2008. The ETFs strive to return 200% of the daily moves of the euro, either up or down depending on the ETN chosen. For example, if the euro rises 2% against the U.S. dollar on any given day, ideally URR will rise 4% and DRR will fall 4%. It is simple to figure out the leverage gained through the ETNs. I would consider the two new ETNs trading vehicles to be long-term investments. (For further reading, check out Dissecting Leveraged ETF Returns.)
New WisdomTree Currency ETFs Launching in May
The new ETFs to be launched by the WisdomTree family of ETFs will seek to provide investors income that is reflective of the money market rates available in certain foreign countries. Along with the income the ETF will also seek to provide exposure to the change in value of the underlying foreign currency in relation to the U.S. dollar. Do not be fooled when you read the words "money market"; the ETF will trade intraday and is considered an actively managed ETF by the SEC.
According to the company's press release there are five currency ETFs slated to launch in May 2008. They include: Chinese yuan, Brazilian real, Indian rupee, euro, and Japanese yen.
Why Currencies?
I believe currencies offer a portfolio several advantages. The first is diversification. When the market is volatile like it is now, the more diversification you have the better. Currencies add an asset class that will move independently of U.S. and foreign equities. Investing in foreign currencies also allows investors to hedge their portfolios against what a falling U.S. dollar could do to their holdings. Finally, the trend is for the U.S. dollar to continue falling, why not ride the trend until there are signs it is over? Currency ETFs are your ticket to ride.
by
Matthew McCall
Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.
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