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)

Euro
CurrencyShares Euro Trust (FXE)
ELEMENTS Euro (ERE)
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

 

Alan

Technorati Tags: Renminbi,Yuan,Rupee,ETF,ECN Currency ETF Currencies,Hedging

Bear with me !!

Generally as a rule we all want the stock market to go up, it feels right , it means things are all well with the world at large.However any of you who have been investing for more than a few years will know that sadly markets do not always go up.So what to do when they start to go down or start behaving in a very volatile fashion like they have been doing lately, I guess there are three things you could do:

 

1 If you are a long term investor-hold off and wait for the inevitable good times to come back-I find this hard to do sitting through drawdowns watching your capital disappear drop by drop

2 Move to cash, certainly this makes it easier to sleep at night but unless your timing is immaculate it can mean that you miss out on a lot of money making opportunities

3 Use some form of investments that allow you to make money as stocks go down.

 

I have spoken before about my use of options, however options are not for everyone and in certain accounts(like my ISA in the UK) you cannot use options.Lately there has been a growth in a number of what are being labelled Contra ETF's-basically ETF's that go up when the market declines-they can be on indices such as the Dow, S&P 500 or the Russell or they can also be on certain commodities such as Oil.

I personally like to use Proshares ETF's go here for a list of the short ones that they offer   http://www.proshares.com/funds?products=98616&fundType=   .They offer a vast range but I tend to favour the more liquid ones such as DOG (Short Dow) or DXD (Ultra Short Dow-twice the index).I also use the PSQ and the QID which are the short and the ultra short on the QQQQ index. These are a great way of either hedging some of your longer term positions or trading to take advantage of some of the volatile swings that we have seen of late. I use them for both purposes.

The advantages of being  able to trade the market long and short as well as being able to hedge are immense and can make a real difference to your returns over the short and long term. I urge you to check out the opportunities that are available with using these types of fund.

 

Over the next few weeks I will share with you some of the ETF's that I will be purchasing and using to try to rid out the volatility in the market that we are currently experiencing.

 

All for now

 

Good Trading

 

Alan

A short Guide to Hedging

As promised here is some background and insight around hedging-incidentally as I surmised the markets took a turn down yesterday and the QQQQ Puts I bought have already increased by just under 20% in one day.I cannot say if this is the beginning of a correction but I am glad I have some downside protection.Hedging is a little discussed but very important tool for investors.It may sound like an outdoor activity involving shears and ladders but it can be the difference between poor and great returns


What Is Hedging?
The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.

Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.

Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.

Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can't help us escape that hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.

How Do Investors Hedge?
For the most part, hedging techniques involve using complicated financial instruments known as derivatives, the two most common of which are options and futures. We're not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

How does this work in Practice
Say you have bought shares in Google(Goog) you believe that they are a good long term bet but you want to protect yourself from any potential downside in the short term.You would buy a number of PUT options in Google to protect you should they fall below a certain price-say $450.
Every put option is worth 100 shares so if you owned 200 shares you would need to buy 2 PUT options.If the share price fell below the $450 then your PUT options would increase in value to protect and minimise the losses.(This is a reasonably simplistic explanation as there are a no of other factors at play here but this is the general principle behind using Options to Hedge)
Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate, or currency.

The Downside
Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn't to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.

We've been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn't a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.

What Hedging Means to You
The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market.

So why learn about hedging?

Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.

Conclusion
Because risk is an essential yet precarious element of investing, you should, regardless of what kind of investor you are, gain a fairly good awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing these intricate uses of derivatives, learning about how hedging works will help advance your understanding the market, which will always help you be a better investor.


Best Wishes

RT