New ETFs enable you to trade currencies in a cost-effective fashion.
On 4 November Ben Bernanke repeated the Fed's ultra low interest policy. In fact he went further, stating that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." That means one thing; the dollar will remain weak, and possibly super weak, for a long time yet.
The good news is that, with the recent launch of a series of currency ETFs, you could benefit from this and other currency movements. As long as you're comfortable with their complexity.
The Attractions of Currencies As An Asset
The beauty of currencies as an asset class is that they are uncorrelated with other assets. Unlike equities, which can all tank at the same time, there will always be some currencies rising while others are falling.
The most popular investment is known as the 'carry trade', where a weak, low interest rate currency is borrowed, or sold (shorted), to invest in a high yielding currency.
For many years, for example, big investors borrowed yen at near to zero interest rates and bought Sterling at 4% interest. Recently the carry trade has meant borrowing the US dollar and investing in higher yielding currencies (or any other asset). Based on Bernanke's comments this is a trade that still has plenty of life in it.
Exchange Traded Currencies
In my first paragraph I referred to them ETFs for convenience and ease of understanding, but more accurately they are called Exchange Traded Currencies (ETCs). On 12 November ETF Securities launched what is claimed to be the world's largest traded currency platform.
Currently there are eighteen ETCs offering the opportunity to trade G10 currencies against the US Dollar. This means that if you're negative on the US dollar but positive on the UK pound you can buy the "long pound short dollar" etc. In this case you make money if the dollar falls and the pound rises, and lose money if the opposite happens.
You also gain exposure to the interest rate on the underlying "long" currency as well. This is insignificant for the UK pound with current interest rates, but is quite useful for high interest currencies such as the Australian dollar. ETF Securities reckon that if the long Aussie dollar short US Dollar etc had been available five years ago it would have returned about 4.8% each year in addition to any currency gains.
The costs of the ETCs are 0.396% per year plus stockbroker trading fees. This is much cheaper than other means of trading currencies for the man in the street. They are based on the Morgan Stanley MSFX Total Return Currency Indicators, and Morgan Stanley is the counter party that assures performance to that standard. You are exposed to counter party risk but that is minimised by full collateralisation.
Not Confident of Choosing The Right Trades?
Even if ETCs are not for you the case for currencies as an asset remains compelling. There are nearly 200 managed currency funds available. Although all of them are based offshore you will recognise many of the investment houses such as Investec, Fidelity and Schroders.
A rather interesting alternative comes from the fund managers, Brevan Howard. They have recently launched a currency trading fund called the Brevan Howard Macro FX Fund. The fund will basically take positions in a number of carry trades and will be managed by a team of four traders who have each proven themselves trading in a similar hedge fund. I hasten to add that this is not a hedge fund but is fully compliant with UCITS III standards.
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