Exchange Traded Funds and Foreign Currency Markets

By: andymanca
In December of 2005, Rydex listed the Euro Currency Trust (FXE) Exchange Traded Fund. This was the first Exchange Traded Fund that allowed investors to enter the currency markets through investing in Exchange Traded funds. With the falling dollar this fund this fund has done well considering the recent market conditions.

Rydex will now give investors in foreign currencies even more options. They will be introducing Exchange Traded funds covering the British Pound, Austrailian Dollar, Canadian Dollar, Mexican Peso, Swedish Krona and Swiss Franc.

Many investment advisors would caution investors in putting money into currencies due to volatility. These markets have been difficult for small investors to enter but ETFs are now making these markets easy to enter. Depending on who you talk to, this could be a good or bad thing.

These funds could be a good investment in an environment of a weakening dollar, which is what we have now. Investors who are investing long term may want to put a percentage of their investments in foreign currencies in order to hedge their portfolios. A number of factors indicate the dollar may have a rough road ahead. The US has a large growing deficit and a number of countries may be considering diversifying their dollar investments. There is also a possibility that some commodities may start trading in foreign currencies in addition to US Dollars.

Many investors may think foreign currencies are too risky to invest in, however many investors would not hesitate to invest in foreign stocks. If investing in foreign stocks it is reasonable to put some of your portfolio in Foreign Currency Exchange Traded Funds.

There has been a great deal of money moving into foreign markets and these were hit pretty hard in the recent downturn. This does not mean that all these markets should be avoided.

Many foreign ETF Stock Funds are not only benefiting from expanding economies but also from currency profits due to the falling dollar. This allows the Fund to grow from two factors. If the local stocks go up in value the fund increases in value and if the value of the dollar falls, the fund also increases in value due to currency appreciation.

An example of two funds that have done well since the beginning of this year are the iShares MSCI Sweden Fund (EWD) and the iShares MSCI Spain Fund (EWP). There are other European Funds that are up for the year. Their increase is clearly due to currency gains and not growth of equities.

The markets are currently very volatile. One week these funds may appear as a good investment and another investing in these funds may appear to be a mistake. This illustrates the case for long term investment rather then treating these funds as commodity investments. If you decide to enter into these investments, enter for the longer term and you can use these investments as a hedge against your US based equity investments.
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