The Currency Factor for International ETFs

 


Visitors: 488

Currency differentials always present unique challenges for investing internationally. Sophisticated institutional investors know when investing overseas they must deal with both currency and conventional market risk. Most know they can hedge their currency exposure through the futures and inter-bank markets. Retail investors have fewer choices—hence the need for currency ETFs.

European investors are more ambidextrous in currency dealings. Prior to the Euros introduction, living and working in Europe required knowledge, and an ability to think in terms of different currencies. Retail US investors don’t have experience in such matters and therefore have remained dollar oriented.

Over the past year we’ve seen how currency valuations can enhance or diminish investment returns. In 2004, some of the best performing markets for US investors were in Europe. At the ETF Digest, we profited by receiving the double-benefit of rising European indexes and a falling dollar. In 2005, good performance in European indexes hasn’t been realized by US Dollar investors since the Euro currency has reversed course and is now declining.

I believe that now we're seeing hints of potential currency benefits for US investors in some China-based US market ETFs like PGJ, and FXI. The widely discussed revaluation of the Chinese Yuan seems already anticipated by some investors.

Here's the bottom line. If you read about how well certain international markets are doing and you're bothered by the lack of comparative results with your US-based ETF, currency differentials are to blame.

Of course one solution is to avoid those markets where these risks seem apparent. Another possibly more profitable outcome is for the introduction of currency-linked ETFs. It is rumored that these are already on the drawing board for some sponsors and issuers. The downside is that since sponsors and issuers only earn fees when investors “buy" new units, they generally tend to sponsor these when buying interest is strong. This is not the case currently.

Nevertheless, should currency ETFs become available retail investors will be able to devise strategies that will allow them to profitably participate in international markets without the additional frustration of good index performance wiped-out by negative currency issues. Developing and putting forth investment strategies for these ETFs would present both opportunities and challenges. The biggest hurdle for retail investors is that “hedging" currencies involves the ability to short them. If retail shorting problems persist, then introducing currency ETFs will be a wasted effort.

Dave Fry has devoted over 30 years to the business of trading and portfolio management. His registration as an arbitrator with both the National Association of Securities Dealers (NASD) and the National Futures Association (NFA) attests to his extensive experience and spotless compliance record.

Dave founded the ETF Digest in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.

Dave is a frequent commentator on ETFs and other issues important to individual investors, and his perspectives are featured in financial news sources such as CBS MarketWatch, Investor’s Business Daily, Dow Jones Newswire, National Business Review, MSN Money, Yahoo! Finance, Bankrate.com , IndexUniverse.com , ETF Zone, and ETF Investor.

(544)

Article Source:


 
Rate this Article: 
 
Forex Currency Trading Trade Currency in the Largest Financial Market
Rated 4 / 5
based on 5 votes
ArticleSlash

Related Articles:

International Foreign Currency Exchange Tips

by: Tyler Ziggler (July 18, 2008) 
(Finance/Currency Trading)

International Currency Trading - Can You Win When 95% of Traders Fail?

by: Samuel Leslie Berkovits (September 07, 2008) 
(Finance/Currency Trading)

International Currency Trading - 95% of Traders Lose Could You Win?

by: Kelly Price (August 26, 2008) 
(Finance/Currency Trading)

Accepting International Credit Cards and Settling in a Foreign Currency

by: Joe Cole (June 20, 2008) 
(Business/International Business)

Forex - An International Online Currency Exchange Amazing World Full of Secrets

by: Mikel Freije (September 10, 2008) 
(Finance/Currency Trading)

Residual Wealth Factor System Summary of the New Global Domains International ..

by: Ronny Abraham (June 17, 2008) 
(Internet and Businesses Online/Internet Marketing)

International Currency Trading - An Opportunity For Wealth For Wealth For All

by: Sonia Kristina (June 23, 2008) 
(Finance/Currency Trading)

X Factor Jewelry - Comes With The Feel Good Factor

by: Kacy Carr (November 27, 2005) 
(Shopping and Product Reviews/Jewelry Diamonds)

Copywriting Tips - The Hype Factor is the X Factor

by: Steven Wagenheim (September 06, 2008) 
(Writing and Speaking/Copywriting)

Forex Currency Trading Trade Currency in the Largest Financial Market

by: Naveah Walker (June 30, 2008) 
(Finance/Currency Trading)