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Currency ETFs Beyond The Usual Suspects
Even if you're currently among the legion of investors that don't have any direct foreign currency exposure in your portfolio, you probably know at least the basics about the forex market and forex trading. If nothing else, you should know that forex is the most liquid financial market in the world and it is open 24 hours a day, five days a week. (Reduce your stock portfolio's risk by trading with foreign currencies. To learn more, read Currency ETFs Simplify Forex Trades.)
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Given the recent events in Greece, the euro, the common currency used by 16 European countries, has come under extreme scrutiny from many investors and outside nations. Furthermore, the U.S dollar, which was once known as a safe haven currency, is subject to currency speculation and is thus becoming riskier.
The Euro and the greenback are the two most heavily traded currencies, but thanks to currency ETFs, investors are conservatively accessing an array of other currencies which were previously ignored, many of which offer solid opportunities. A Real Opportunity with the Real
The Brazilian real is often speculated as a commodity currency, meaning that strong oil prices usually lend strength to the real given Brazil's vast oil reserves. The Brazil investment story is well known for its extraordinary growth; the largest South American country is evolving from an emerging market to a true player on the world economic stage.
Continued strength in Brazil's domestic economy should be a catalyst that lifts shares of the WisdomTree Dreyfus Brazilian Real ETF (NYSE:BZF). In fact, in the past month BZF has sharply outperformed the comparable long Euro ETF (no surprise there) and has nearly been on pace with most popular long U.S. dollar ETF.
Moody's Investors Service has a positive outlook on Brazil's credit and debt ratings, and with the country's positive GDP forecast, BZF may have more gains in store for astute investors. (For a brief overview on the importance of GDP, refer to What is GDP and why is it so important?)
Two Options for Yen Exposure
The Japanese yen, like the dollar, is what the market regards as a "safe haven" currency. If you see riskier currencies like the euro, British pound or Australian dollar taking a tumble, the yen is likely gaining on the other end.
There are two yen ETF options for investors that are bullish on the the currency: The WisdomTree Dreyfus Japanese Yen ETF (NYSE:JYF) and the CurrencyShares Japanese Yen Trust (NYSE:FXY). Since both ETFs do the same thing and have traded in lock-step with each other recently, FXY might be the better option as it is far more liquid than JYF. On the other hand, JYF offers an expense ratio of 0.35%, which below FXY's expense ratio of 0.40%.
Ready for some Risk? Try This ETF
If you're willing to take on a little more risk and want exposure to a basket of emerging markets currencies, then the WisdomTree Dreyfus Emerging Currency ETF (NYSE:CEW) may be for you. CEW tracks the emerging market currencies such as Taiwan, South Korea, Israel and Chile, Brazil, China and Indian, among others.
One would think that the performance of CEW is highly correlated to emerging market equities, but in the last year, CEW has underperformed the iShares MSCI Emerging Markets Index (NYSE:EEM), the most heavily traded emerging markets ETF, by a wide margin. Both ETFs are down in 2010 and it's hard to recommend CEW as a conservative way of gaining currency exposure.
The Bottom Line
Currency ETFs represent a fine diversification tool for portfolios of any stripe, but as is the case with equities, it pays to look beyond the mundane and be as diversified as possible. Of the ETFs mentioned here, BZF probably offers the best intermediate- to long-term prospects. (To learn more about currency ETFs, read Profit From Forex With Currency ETFs and Hedge Against Exchange Rate Risk With Currency ETFs.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 7 Tools Of The Trade
Given the recent events in Greece, the euro, the common currency used by 16 European countries, has come under extreme scrutiny from many investors and outside nations. Furthermore, the U.S dollar, which was once known as a safe haven currency, is subject to currency speculation and is thus becoming riskier.
The Euro and the greenback are the two most heavily traded currencies, but thanks to currency ETFs, investors are conservatively accessing an array of other currencies which were previously ignored, many of which offer solid opportunities. A Real Opportunity with the Real
The Brazilian real is often speculated as a commodity currency, meaning that strong oil prices usually lend strength to the real given Brazil's vast oil reserves. The Brazil investment story is well known for its extraordinary growth; the largest South American country is evolving from an emerging market to a true player on the world economic stage.
Continued strength in Brazil's domestic economy should be a catalyst that lifts shares of the WisdomTree Dreyfus Brazilian Real ETF (NYSE:BZF). In fact, in the past month BZF has sharply outperformed the comparable long Euro ETF (no surprise there) and has nearly been on pace with most popular long U.S. dollar ETF.
Moody's Investors Service has a positive outlook on Brazil's credit and debt ratings, and with the country's positive GDP forecast, BZF may have more gains in store for astute investors. (For a brief overview on the importance of GDP, refer to What is GDP and why is it so important?)
The Japanese yen, like the dollar, is what the market regards as a "safe haven" currency. If you see riskier currencies like the euro, British pound or Australian dollar taking a tumble, the yen is likely gaining on the other end.
There are two yen ETF options for investors that are bullish on the the currency: The WisdomTree Dreyfus Japanese Yen ETF (NYSE:JYF) and the CurrencyShares Japanese Yen Trust (NYSE:FXY). Since both ETFs do the same thing and have traded in lock-step with each other recently, FXY might be the better option as it is far more liquid than JYF. On the other hand, JYF offers an expense ratio of 0.35%, which below FXY's expense ratio of 0.40%.
Ready for some Risk? Try This ETF
If you're willing to take on a little more risk and want exposure to a basket of emerging markets currencies, then the WisdomTree Dreyfus Emerging Currency ETF (NYSE:CEW) may be for you. CEW tracks the emerging market currencies such as Taiwan, South Korea, Israel and Chile, Brazil, China and Indian, among others.
One would think that the performance of CEW is highly correlated to emerging market equities, but in the last year, CEW has underperformed the iShares MSCI Emerging Markets Index (NYSE:EEM), the most heavily traded emerging markets ETF, by a wide margin. Both ETFs are down in 2010 and it's hard to recommend CEW as a conservative way of gaining currency exposure.
The Bottom Line
Currency ETFs represent a fine diversification tool for portfolios of any stripe, but as is the case with equities, it pays to look beyond the mundane and be as diversified as possible. Of the ETFs mentioned here, BZF probably offers the best intermediate- to long-term prospects. (To learn more about currency ETFs, read Profit From Forex With Currency ETFs and Hedge Against Exchange Rate Risk With Currency ETFs.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Todd Shriber
Todd Shriber was a financial journalist for five years with Bloomberg News and MergerMarket.com, covering a variety of sectors, including energy, financials and technology. He is also a Series 7 license holder and has actively traded equities, forex and options.
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