Do you follow the fall of the dollar or the euro rise? You want to know how to defend dollar assets and benefit from lifting the euro? Usually, to make a profit on the difference in rates, it is necessary to trade currency futures, Forex open profiles or buy currency.
Nevertheless, there is a much simpler method–currency exchange investment fund (ETF), which avoids the complete mess with futures and Forex. In this article, we look at the causes of growth and decline in exchange rates, and understand the types available to investors stock investment funds.
Causes of Currency Fluctuations
Exchange rate indicates how many units of one currency we can get another unit. With the change in the value of currencies takes place and change in the exchange rate. Among the factors that may affect the price of movement are: economic growth, level of debt, the price of gold and oil prices, trading volume and others.
For example, the slowdown in GDP growth, increasing the national debt and the trade deficit, could trigger a decline in value of one currency to another. Rising oil prices could also lead to an appreciation of the currencies of countries that are net exporters of oil or have significant oil reserves, such as Canada.
A more detailed example is the trade deficit which means that the country imports more than it exports. Here, importers increase demand for the currency of other countries, trying to pay for imported goods. As a result, the exchange rate of the importing country falls.
How does the stock fund?
For years, investors have used stock funds instead of mutual funds (PIFs) to track fluctuations in the major stock indexes such as the S & P 500.
The advantages of investment in the exchange include:
1) Easy Trades: bought and sold at any time through a broker, like stocks.
2) The Effectiveness of a Tax Point of View: As a rule, ETF portfolio turnover below, while the distribution of the return on capital is minimized, so taxes are paid only when investors sell their shares.
3) Greater Transparency: Stock funds daily update information about their assets, so the members of the fund know exactly what they have and what they pay.
4) Flexibility: With the ETF, you can do the same thing with the usual activities. Currency ETF allow investing in foreign currency, just as investments made in shares or other ETF.
Currency ETF may duplicate of currency movements on the foreign exchange market or hold foreign currency deposits or using future contracts. These methods adequately reflect currency fluctuations.
Typically, such funds low fees, but it is desirable to specify the conditions before committing the transaction.
There are several types of foreign exchange funds.
Some specific currency tracking. For example, the Swiss franc following funds Currency shares Swiss Franc Trust (NYSE: FXF).
If according to forecasts, the Swiss franc strengthened against the dollar, you can buy this ETF, if the expected weakening of the franc, you can open a short position in this ETF.
You can buy ETF, which reflects fluctuations in the currency basket. For example, PowerShares DB USDollar Bullish (NYSE: UUP) and Bearish (NYSE: UDN), respectively, follow the growth and decline of the U.S. dollar against the Euro, Yen, Pound, Canadian dollar and Swiss franc. So, if you think the U.S. dollar quotations in the foreign exchange market will fall.
There are even more exciting currency ETF, such for example DB G10 Currency Harvest Fund (NYSE: DBV), which reflects fluctuations in the index G10 Currency Future Harvest from Deutsche Bank.
This index takes advantage of yield spreads, buying futures contracts for higher-yielding currencies of Big Ten and selling futures three currencies with the lowest yield.
As in many other ETF, ETF selling when the foreign currency rose against the dollar, the trader makes a profit. In the opposite case, the holder is losing ETF.
Currency ETF can be attributed to a useful diversification tool, allows you to track the movement of major currencies, including the following:
– Australian Dollar;
– British pound;
– Canadian Dollar;
– Japanese Yen;
– Mexican Peso;
– Swedish Krona;
– Swiss Franc.
With the growing popularity of exchange submitted by ETF will undoubtedly increase.
Currency ETF involves several risks inherent in the foreign exchange market:
– Political problems;
– The public debt;
– The trade deficit;
– Changes in interest rates;
– Changes in interest rates in other countries;
and foreign exchange intervention;
– changes in the prices of raw materials.
It is essential to be aware of the existence of these risks and understand how this could affect the currency ETF.
ETF popularity is growing every day, opening new prospects to investors. These tools and hedge risks, and to speculate on exchange rates. Like all kinds of investments, ETF involves certain inherent risks, and before you plunge headlong into the trade, it is necessary to contemplate all relevant aspects.