How to make Money in the Stock Market.This blog looks at how you can make money trading and investing in Forex, Stocks Options and Futures.


Sunday, 27 April 2008

Using Currency ETFs and ETNs to reduce Currency Risk And Investing in Indian Rupee and Chinese Yuan

For a while there have been a substantial number of ETF's that track the major currencies around the world. These give investors the opportunity to be able to position themselves based on Global Macro Economic views.Over the past few years you would have dine very well being invested in the higher yielding "Commodity  based Currencies such as the Australian Dollar.

What Are They?

  • Currency ETFs (exchange-traded funds) track a singe foreign currency or basket of currencies by using foreign cash deposits or futures contracts. For the ETFs that use futures, excess cash is usually invested in high quality bonds, typically US Treasury bonds. The management fee is deducted from the interest earned on the bonds.

  • Currency ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with an underlying currency exchange rate. Because they are debt obligations, ETNs are subject to the solvency of the issuer.

It is also a useful way to hedge a portfolio if you are heavily invested in a currency that is not your home currency. It means you can reduce the currency based risk when you repatriate your funds back to your home bank account.

Over the past few years I have suffered as a UK investor with a substantial number of positions in the US dollar. To my knowledge there are no US brokers that will allow  you to hold your funds in any other currency beside US dollars.That is not too major an issue if you are a US investor or plan to retire there or make any major purchases in US dollars.

However if you are based outside the US then it can turn a good portfolio performance in to a poor one or even a loss when you try to bring your funds back to your own Country.

Using Currency ETF's can help manage this risk-in the last little while there has been an increasing number of these ETF's launched and I have listed them below

Australian Dollar
CurrencyShares Australian Dollar Trust (FXA)
ELEMENTS Australian Dollar (ADE)

British Pound
CurrencyShares British Pound Sterling Trust (FXB)
ELEMENTS British Pound (EGB)
iPath GBP/USD Exchange Rate ETN (GBB)

Canadian Dollar
CurrencyShares Canadian Dollar Trust (FXC)
ELEMENTS Canadian Dollar (CUD)

Chinese Renminbi
Market Vectors - Chinese Renminbi/USD ETN (CNY)

CurrencyShares Euro Trust (FXE)
iPath EUR/USD Exchange Rate ETN (ERO)

Indian Rupee
Market Vectors - Indian Rupee/USD ETN (INR)

Japanese Yen
CurrencyShares Japanese Yen Trust (FXY)
iPath JPY/USD Exchange Rate ETN (JYN)

Mexican Peso
CurrencyShares Mexican Peso Trust (FXM)

Swedish Krona
CurrencyShares Swedish Krona Trust (FXS)

Swiss Franc
CurrencyShares Swiss Franc Trust (FXF)
ELEMENTS Swiss Franc (SZE)

Recently there have been two new exotic additions to the Currency ETF/ETN portfolio's namely an ETN that tracks the Indian Rupee and and ETN that tracks the Chinese Yuan.

Since it is not easy to directly invest in either of those currencies then the ETN may be a good way to go if you wish to get in  early particularly on the Chinese Yuan which most people are thinking about going long on with the expectations of the continued revaluation against the US Dollar in the years to come.


Best Wishes