To play emerging markets, you can either buy stocks or currencies, and ETFs are a great way to get involved on the currency side without being a full-on currency trader, says Todd Shriber of the Global Profits Alert.
In the past, I touched on some of the basic concepts involving foreign-currency ETFs, and for the purposes of simplicity, I opted to focus more on examples that highlighted single-country ETFs. Single-country currency ETFs are a stark departure from multi-country equity ETFs, particularly when compared against emerging-markets ETFs.
For example, the Vanguard MSCI Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM) are the two biggest emerging-markets ETFs as ranked by assets, and both funds offer exposure to multiple countries.
Obviously, when an investor buys an ETF like the CurrencyShares Australian Dollar Trust (FXA), that ETF solely offers exposure to the Australian dollar. FXA tracks the Aussie dollar, and that's that.
But for investors looking to get exposure to multiple currencies under the umbrella of one ETF, rest assured, there's an ETF for that as well. Actually, there are several, and I'll show you a few of my favorites today.
Consider PowerShares DB G10 Currency Harvest ETF (DBV), a conservative way to execute the carry trade.
In a carry trade, a forex trader will typically borrow a low-interest-rate security, such as the US dollar or Japanese yen, to purchase a high interest-rate currency like the Aussie dollar. The profit potential is the interest-rate differential between the two currencies.
The way DBV works is pretty simple: At any one time, the ETF is long the highest interest-rate G10 currencies, and short the lowest interest-rate members of the group.
This objective is accomplished by using futures contracts, hence the 0.75% expense ratio, but DBV is still a sound bet for those looking to employ a carry trade without the risk of doing so directly in the forex market.
WisdomTree Commodity Currency Fund (CCX)
If you have ever heard the term "commodity currency" and become confused, there's no need to be. What this means is a currency whose movements share an intimate correlation to a particular commodity.
The Aussie and Canadian dollars are two prime examples. Australia's dollar has been known to share an intimate correlation to gold, while the same can be said of Canada's "loonie" and oil.
CCX offers exposure to those currencies and others that share the commodity currency label, such as the Brazilian real, the Russian ruble, the New Zealand dollar, and the South African rand, among others.
Rather than directly shorting dollars when commodities are on the upswing, CCX gives investors another way of participating in the upside offered by gold, oil, and related fare.
Wisdom Tree Emerging Currency Fund (CEW)
This ETF is like EEM or VWO in that it offers exposure to an array of emerging-markets currencies, but that's just one reason to put this ETF on your list of candidates for forex exposure. Trading exotic currencies in the forex market can be costly because of wide bid/ask spreads, but investors can avoid that problem with CEW.