Currency Trading for Regular Folks

03/09/2009 1:00 pm EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor of Forbes ETF Advisor, says currency ETFs now play a more prominent role in investors’ portfolios, and he recommends several.

Currency trading is both as basic and as potentially volatile as investing gets. Basic, in that high-interest-rate currencies have a tendency to strengthen relative to low-interest- rate currencies, and vice versa. Volatile, in that that basic metric can change overnight, intraday, on a whim, without warning.

For the first half of last year, we made hay using a basket approach to currencies rather than betting on a single one. The PowerShares Currency Harvest (NYSEArca: DBV) let us not only buffer the blows of the stock market well; it also helped us keep pace with the rapidly changing and economic landscapes here and abroad.

Benchmarked to the Deutsche Bank G10 Currency Future Harvest—Excess Return index, which seeks to make use of the trend that high-interest rate currencies have a tendency to strengthen relative to low-interest rate currencies. The G10 currencies include the US dollar, the euro, Japanese yen, Canadian dollar, Swiss franc, British pound, Australian dollar, New Zealand dollar, Norwegian krone, and Swedish krona. It has a market value of $263 million and an average daily trading volume of approximately 156,000 shares. It began trading in September 2006 and charges 0.75% in expenses.

As that landscape went from bad to worse, we sought the safe haven of the Almighty Dollar. It worked.

The PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) has been (and remains), our play on a weakening global economy and a ratcheting up of fear on a global scale.

It seeks investment results that correspond to the price and yield performance of the Deutsche Bank Long US Dollar Futures index, which is designed to correspond to the performance of being long the US dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It began trading in February 2007 and carries an expense ratio of 0.50%. It has a market value of $358 million and an average daily trading volume of 716,000

Right now I think CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) is an attractive way to diversify a stake in the as-yet-unseen recovery. It trades on a relative multiple to natural resources overall (they’re the lifeblood of Canada’s economy), and has a useful noncorrelation to the Standard & Poor’s 500 index.

I also think that Europe’s economy remains in the cross hairs of our weakening one, making shorting Europe one possible move on the board, [as is selling the] CurrencyShares Euro Trust (NYSEArca: FXE). The euro is the second most traded currency today [and] the currency of 15 European countries. FXE began trading in December 2005 and charges 0.40% in expenses. It has a market value of $584 million and an average daily trading volume of 626,000 shares.

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