Currency ETF: Can You Win At This Zero-Sum Game?
Currency exchange traded funds (ETFs) hold currency rather than companies like traditional ETFs. The idea being that you could buy shares of the ETF and in effect hold different currencies.
What I haven't figured out is whether a currency ETF would be a valuable diversification tool or if they would simply encourage market timing which I try to avoid. Here's my reasoning. To make money with a currency ETF you would need to buy shares when your home currency is high relative to the one you're buying. And then you would sell when your home currency decreased in value relative to the one you bought. This might sound similar to what you would do with other ETFs except for one subtle point. With other asset classes, there is an implicit belief that all asset classes will increase in price over the long term. Currencies, whose values are relative to each other, can't all go up no matter how long you wait.
So what's the point in buying a currency ETF? Well, I'm sure institutional investors that move in and out of asset classes and sectors can benefit with enough information. But I'm not an institutional investor and that's why I don't think these ETFs have any value for small investors with the exception of one situation. If I were planning a move to another country, I may choose to convert to that currency now so that I have some guarantee of knowing how much I'll have in the country I'm moving to. That's a bit of a stretch though.
Want another perspective? A Seeking Alpha editor put it nicely:
“I don't see the attraction of the currency ETFs. Each of the currency ETFs consists of 100 units of the base currency deposited in a savings account with the London branch of JPMorgan Chase Bank. Each deposit account will pay slightly less than the currency overnight interest rate (0.27% less for Euro shares (FXE), 0.40% less for the Swedish Krona trust (FXS) ). On top of being paid less than normal deposit rate, you get the added indignity of paying 0.40% in fund expenses.”
Regardless, I know that some investors will want to try their hand at currency related trading and now they can. As of today, several new ETFs from Rydex, called “Currency Shares” have started to trade. All of these funds have expense rations of 0.40%:
- Australian Dollar Trust (FXA)
- British Pound Sterling Trust (FXB)
- Canadian Dollar Trust (FXC)
- Mexican Peso Trust (FXM)
- Swedish Krona Trust (FXS)
- Swiss Franc Trust (FXF)