Currency ETFs - How To Profit From A Rising Dollar, Yen or Euro
By Simon Maierhofer, Co-Founder
January 12, 2009
Index ETFs cover all sorts of asset classes: equities, bonds, real estate, commodities and currencies. Currency ETFs are probably the least talked about class of ETFs.
According to ETFguide’s database, there are 32 currency ETFs available. The ETFs track the performance of single currencies or the exchange rate between two currencies. The ETF might be pegged to something familiar like the Canadian currency or exotic like the Russian ruble or Swedish krona.
Currency ETFs account for approximately $3.3 billion in assets. Over two thirds of currency ETF assets are invested Rydex lineup of CurrencyShares. The CurrencyShares Japanese Yen Trust (NYSEArca: FXY) attracted $700 million in assets and rewarded investors handsomely in 2008.
While the S&P 500 (AMEX: SPY) and Dow Jones (AMEX: DIA) lost in excess of 35%, the Yen Shares returned 20%. The strength of the yen has hurt Japan’s economy. Former growth stocks are struggling as reflected by the iShares MSCI Japan ETF (NYSEarca: EWJ). Market Meter Short-Term: published on Oct. 21, 2008
This is a double whammy for companies like Toyota (NYSE: TM) and Honda (NYSE: HMC). Not only did Toyota’s December sales drop by 37%, a strong yen also cut into operating profits. For every yen gained against the dollar, Toyota’s operating profit slips by about $400 million (annually).
Below is an excerpt from the ETF Profit Strategy Newsletter – Published on Oct.21, 2008
At the time, the Dow was above 9,000. It dropped below 7,500 and rallied into Nov./Dec
The Dow should find a “trade-able bottom” between 7200 – 7,500
Mid-Term: published on Oct. 21, 2008
Once bottomed, the stock markets will rally into Nov/Dec
Long-Term: >> Sign up to find out
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Currency ETFs can be used against “currency-induced economic distress”. In the above sample, adding the Yen Shares to a portfolio would neutralize (at least to a certain extent) weakness in Japanese stocks.
The CurrencyShares Euro Trust (NYSEArca: FXE) eked out gains early this year as the euro strengthened against the dollar. Towards the latter part of 2008, the Euro Shares dropped (albeit slightly) in unison with the SPDR DJ Euro STOXX 50 ETF (NYSEArca: FEZ). If you believe a stronger euro will hurt Europe’s economy, the Euro Shares might be an option for your portfolio.
Despite the devaluation of the U.S. currency, the greenback has held up surprisingly well. This is probably not due to strength in the U.S. dollar but much more to weakness in other currencies. After all, the U.S. is not the only country involved in the global meltdown.
A look around the globe shows that the U. K. (NYSEArca: EWU), Germany (NYSEArca: EWG), France (NYSEArca: EWQ), Hong Kong (NYSEArca: EWH), Brazil (NYSEArca: EWZ) and dozens of other developed and emerging markets have had a much worse 2008 than the U.S., affecting the global currency market.
A rally of the U.S. dollar against other currencies seems likel. If you think the U.S dollar will gain more ground on the euro, consider the PowerShares DB U.S. Dollar Index Bullish (NYSEArca: UUP).
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When investing in currency funds, beware that currency ETFs have a different tax treatment than
currency ETNs. In December 2007, the U.S. Internal Revenue Service issued an adverse tax ruling on currency linked ETNs (read more about the difference between ETFs vs ETNs here).
In addition, ETNs are debt instruments and as such investors carry the credit risk of the issuer. In times of financial turmoil, this risk should not be underestimated.
Short-Term: published on Oct. 21, 2008