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How To Trade Currencies Using Exchange Traded Funds
March 7, 2010 | 8 Comments
By: John Nyaradi
Until relatively recently, currency trading was the domain of the exotic Forex markets but now individual investors can participate in the currency and foreign exchange markets using Exchange Traded Funds.
Several ETF providers offer exposure to the currency markets and in this article we’re going to take a look at what’s available to investors interested in this market.
Two of the largest fund families that offer currency related products anr Rydex and ProShares.
Rydex offers its Currency Shares suite that includes:
Currency Shares Australian Dollar Trust (FXA)
Currency Shares British Pound Sterling Trust (FXB)
Currency Shares Canadian Dollar Trust (FXC)
Currency Shares Canadian Dollar Trust (FXC)
Currency Shares Euro Trust (FXE)
Currency Shares Japanese Yen Trust (FXY)
Currency Shares Mexican Peso Trust (FXM)
Currency Shares Russian Ruble Trust (XRU)
Currency Shares Swedish Trust (FXS)
These are all liquid and actively traded offerings that allow investors to go “long” a particular country’s currency.
Lately the Euro has been in the news as hedge funds and others “short’ the currency in response to the problems in Greece. For investors who believe the Euro is destined to continue its decline, one can look to the ProShares family for opportunities to “short” the Euro.
Their primary offering on the “short” side is (EUO) UltraShort Euro ProShares ETF which aims to produce two times the inverse movement of the Euro to the U.S. Dollar. So as the Euro declines, this ETF is designed to go up at twice the rate.
Another short offering is Market Vectors Double Short Euro ETN (DRR) which is also designed to provide leveraged returns against the Euro.
And if you would rather invest directly in the fortunes of the U.S. Dollar, you can take a look at two offerings from PowerShares, one bearish and one bullish.
For those who believe that the dollar is doomed, the PowerShares U.S. Dollar Bearish ETF (UDN) would be the one for consideration and if you feel that the Dollar will rally going forward, then the PowerShares U.S. Dollar Bullish ETF (UUP) would be the place to put your money to work.
A more sophisticated currency trading strategy is known as the “carry trade” that is used by currency traders all over the world. The strategy of this trade is to sell currencies of countries with low interest rates and buy currencies belonging to countries with higher interest rates. The idea here is that countries with higher interest rates will have stronger currencies and so those will appreciate while low interest rate countries will experience declines in the value of their currencies.
For retail investors who don’t want to get involved in the currency markets directly, two ETFs are available that will essentially do the carry trade for you.
One is offered by PowerShares and is known as the PowerShares Currency Harvest (DBV) and the other is the iPath Optimized Currency Carry ETN (ICI)
To dig a little deeper, the iPath Optimized Currency Carry invests in high yield currencies using money borrowed from lower yielding currencies. This ETN focuses on the G 10 currencies that include the U.S. dollar, Euro, Yen, Canadian Dollar, British Pound and Swiss Franc, among others.
So again we see that Exchange Traded Funds have opened new doors for investors into sophisticated strategies that were previously unavailable without large sums of capital and expertise. However, as always, one must do one’s homework because this is still an area with tremendous volatility and particular care must be exercised for investors who choose the leveraged or inverse products. With adequate preparation and knowledge, even small investors can participate in foreign exchange which is the largest financial market in the world.
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Disclaimer:
All material herein is believed to be correct but its accuracy is not guaranteed. This article represents solely the opinions of John Nyaradi and readers are encouraged to consult their investment advisors prior to making any investment decisions. All information herein is for general informational and educational purposes only. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations. There is risk of loss in all trading and readers are encouraged to read the full disclosure statement at http://www.wallstreetsectorselector.com/disclosure.html. None of the information in this article is intended to be investment advice or any kind or offer or solicitation to buy, sell or otherwise invest in any fund, company or security. Nothing herein represents a recommendation, claim, promise, guarantee or warranty regarding the suitability or profitability of any investment.
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8 Comments so far
InstaTrader
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