Taking Clients Beyond Stocks and Bonds

Pressure on the U.S. dollar has been considerable. Late last year, the greenback touched 14-year lows versus the British pound, sparking worries that the worst is yet to come amid slowing GDP, rising government debt and a whopping trade gap. As a result, some investors holding dollars and dollar-denominated securities are looking for ways to hedge against further declines. Is currency trading the answer?

 

Foreign exchange markets have been made to look somewhat glamorous by successful speculators like George Soros , who is famous for making big bets like his $10 billion wager that the British pound would collapse in 1992. In a single day, he reaped a $1 billion windfall and became an investing legend. Still, it’s fair to say that when it comes to currency investing, Soros is the exception, not the rule. Most currency investors, no matter how skilled, will never match his success.

 

How can investors who aren’t George Soros get exposure to currency markets?

 

Currency-linked ETFs

For mainstream investors, sophisticated currency strategies, while sexy, are easier discussed than executed. But the emergence of currency-linked trusts, which are categorized as ETFs , may change that. Rydex Investments manages a series of seven trusts that aim to track the movement of various countries’ currencies. Known as CurrencyShares , the oldest member of this family is the Euro Currency Trust (NYSE: FXE), which has amassed just under $1 billion of assets.

 

“This appeals more to retail investors than the futures market because there’s less leverage built into the product,” says Mike Mills, president of Mike Mills Wealth Management, in Southlake , Texas . “That being said, this is more geared for a trading or hedging strategy versus a long-term core position.”

 

Unlike traditional ETFs , which are registered under the Investment Company Act of 1940, CurrencyShares are grantor trusts governed under the Securities Act of 1933. They’re created and redeemed in each respective foreign currency and don’t use any leverage or derivatives. The actual currency is deposited within each trust and held at a secure depository managed by the London branch of JPMorgan Chase Bank.

 

Another feature that distinguishes CurrencyShares from traditional ETFs is that these investments do not follow a benchmark index or have a portfolio manager. Rather, they’re designed to imitate the price of the underlying currency according to the Federal Reserve noon buying rate.