Three ETFs Giving Access to Foreign Exchange
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Foreign Exchange, aka Forex or FX, is an investment class that is gaining popularity among retail investors. The FX markets are the most liquid and have 24 hour access, 5 days a week. These markets were once the domain of institutions that were involved in facilitating international trade. Now with the introduction of derivatives and other platforms that bring FX closer, the average investor can now participate through the use of a wide number of vehicles or programs.
Forex is a tricky asset class. Profits occur when an investor is on the correct side of a position that profits when the relative value of the comparative currencies move favorably. Factors such as interest rates and government policies of the sovereign entity that issues the currency have significant influence only when this currency is compared to another.
Another factor that can add to the complexity of how to enter these markets is that events that affect currency value can happen at any point during the 24-hour trading period. It is very easy for a policy change by an issuing government to take place during hours when a US investor is asleep. More often than not, waking up to unpleasant surprises is very disruptive especially when leveraged vehicles are used.
One method that can assist the retail investor in this space is to hold ETFs that are designed to match a specific index and automatically adjust the holdings so as to maintain the correlation to this index.
The PowerShares DB G10 Currency Harvest Fund (NYSEMKT: DBV) is an ETF that is designed to track the Deutsche Bank G10 Currency Future Harvest Index. DBV does this by going long, or buying, currencies that have relatively high interest rates and going short, or selling currencies that have relatively low interest rates. DBV started September of 2006 and has posted stable returns for different measurement periods. The returns, while seemingly small are better than what money markets are currently yielding and portfolio diversification is improved by holding such an asset that is not correlated to the general equity markets. Some basic information on DBV can be found here. http://www.bloomberg.com/quote/DBV:US
The Wisdom Tree Dreyfus Emerging Currency Fund (NYSEMKT: CEW) is an ETF that is unique in that its investment philosophy is not tied to an index, which makes this vehicle susceptible to style drift and it seeks to earn money market rates from emerging markets. Countries such as South Africa, Russia, Turkey, China, Poland and Mexico are part of the places where CEW invests. This ETF is not for the faint of heart. The risk/reward ratio of investing in treasury bills from such places, even in a fund like structure, is going to be considerably higher. For the investor that has the long-term view that such emerging countries will grow faster than the rest of the developed world, this may be a good place to consider taking such a position. Details on this ETF can be found on this link. http://www.wisdomtree.com/etfs/fund-details-currency.aspx?etfid=70
The iPath Optimized Currency Carry ETN (NYSEMKT: ICI) is an obligation issued by Barclays Bank that will provide cash payment at maturity or early redemption based on how this exchange-traded note performs in line with the Barclays Intelligent Carry Index. The “carry trade” is a currency investment idea that is based on the interest rate differential of two different currencies. This is a leveraged transaction that calls for a currency with a low interested to be sold and a currency with a high interest rate to be purchased. It's similar to a yield differential strategy that is used in fixed income strategies. ICI was started on Jan 31, 2008 and has a maturity date of Jan 28, 2038. Unlike ETFs this ETN is an obligation of Barclays and its credit rating must be considered along with the strategy prior to purchasing this instrument. ICI does offer a unique perspective and like the other ETFs mentioned, can be a diversifier of a well balanced portfolio. More information on ICI is on this webpage. http://www.ipathetn.com/us/product/ICI/
Forex investing does make a bridge in the gap between fixed income and equities and an appropriate allocation to this asset class can enhance the returns and reduce the risk on an overall portfolio basis. The challenge to entering this space is finding the vehicle or program that best fits the investor’s temperament.
Jeffrey L. (Jeff) Stouffer is an Investment Advisor Representative and manages the Alexandria VA office of Kingsview Asset Management. As a practicing financial advisor serving the needs of individuals and small businesses, he believes in using a wide range of investment strategies, including alternative investments. All strategies are client centric and unique. He can be reached at jeff.stouffer@kingsviewassetmanagement.com
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