No Need for Currency ETFs to Bet on Exchange Rates

Before rushing to purchase a currency ETF or ETN, it's useful to evaluate the implicit currency bets that might already be lurking inside your portfolio

John Gabriel 18 November, 2010 | 9:41AM
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The case for currencies as an asset class is a debate that has been gaining more and more (pardon the pun) currency. Compared to the fourth quarter of 2009, asset flows into currency exchange-traded funds had cooled off considerably in the first half of this year. That is, until the Federal Reserve's recently announced second quantitative easing programme sparked concerns of global currency wars. In the US, currency ETFs and exchange-traded notes saw net outflows totalling nearly $2.5 billion through the first nine months of the year, but investors poured more than $119 million into the group in October. As of Nov. 15, 2010, there was about $5.3 billion invested across 32 currency funds on the US market.

The proliferation of currency ETFs is yet another example of ETFs democratising an asset class in which its accessibility was previously difficult or impractical for retail investors. However, just because these tools are readily available to everyone (as a result of their exchange-traded nature) doesn't mean they're necessarily appropriate for all.

Before rushing to purchase a currency ETF or ETN, it's useful to evaluate the implicit currency bets that might already be lurking inside your portfolio. UK-based investors who own non-UK assets most likely already have sizable exposure to foreign currencies. Remember, the total return of foreign assets for UK investors is composed of two parts: its local price return and the currency's change relative to the pound over the investment period. As international stock and bond allocations make up bigger and bigger slices of many investors' portfolios, it becomes increasingly important to recognise and understand the impact that currency exposure can have on your portfolio's risks and returns.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

John Gabriel  is an ETF strategist with Morningstar, responsible for Canadian ETF research.

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