As the U.S. dollar continues to show signs of weakness and the U.S. economy struggles to overcome the powerful forces of high unemployment, investors have been looking at ways to hedge their exposure to the dollar and the answer might lie in other currencies.
Traditionally speaking, investors have shunned away from currencies due to their volatility and have turned to other areas like bonds, commodities and foreign markets to hedge their exposure to the dollar. When it comes to commodities, most turn to gold (Ways to Play Gold) and crude oil to protect themselves since they are traded in dollars making them cheaper and more attractive to foreign investors. As for foreign markets, most have turned to emerging and frontier markets (More on emerging markets) as these nations are growing at exponential rates and are putting their footprint on the global economy.
The U.S. dollar has fallen as a result of heavy borrowing and massive “money printing” by the federal government in an attempt to fund programs to bolster the crippled economy and many think that it will continue to do so, keeping the dollar at depressed levels. To capitalize on this situation through the use of foreign currencies, one can consider exchange traded products offered by Rydex Funds, WisdomTree and Invesco PowerShares.
The funds provided by Rydex are structured as grantor trusts with expense ratios of 0.4% and hold foreign currencies in overseas interest-bearing accounts where their appreciation or depreciation is directly determined by the movement in the relative currency versus the U.S. dollar. They are primarily used to gain single county currency exposure. Common Rydex funds include the CurrencyShares Australian Dollar Trust (FXA) and the CurrencyShares Euro Trust (FXE).
For a more diversified approach, Wisdom Tree offers the WisdomTree Dreyfus Emerging Currency Fund (CEW) which enables one to gain exposure to eleven different emerging market currencies, including India, South Africa, China, Brazil, Mexico, South Korea, Chile, Poland, Israel, Turkey and Taiwan. The fund carries an expense ratio of 0.55% and aims to offer investors current income reflective of foreign money market rates available to U.S. investors.
PowerShares offers a unique approach to gaining exposure to foreign currencies through its PowerShares DB G10 Currency Harvest Fund (DBV) which takes long positions in futures contracts in the three G10 currencies with the highest interest rates while simultaneously taking short positions in futures contracts in the three G10 currencies with the lowest interest rates. DBV carries an expense ratio of 0.75%
The above mentioned ETFs are just a few of the many currency ETFs available to investors.
