Selecting currency

How the average investor can get a taste of foreign tender

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Katie Benner and Beth Kowitt

yen.mkw.gif
How has Wall Street responded to last year's collapse of Lehman Brothers?
  • Made significant changes
  • Some reform, but more needed
  • Business as usual
  • It's gotten worse
CDs & Money Market
MMA 0.69%
$10K MMA 0.42%
6 month CD 0.94%
1 yr CD 1.49%
5 yr CD 1.93%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- Investing in currencies is tricky for the average person. The traditional alternative, buying foreign stocks, doesn't offer the diversification of currency investing because such stocks are often correlated to U.S. equities.

Foreign bonds have their own downside: interest rate risk. Still, investors should put about 5% of their assets in currencies, argues Samson Capital's Jonathan Lewis, who notes that their asset class held up better than stocks during the financial crisis.

One way to get a taste of foreign tender, says Morningstar's Bradley Kay, is through the SPDR DB International Protected Bond (WIP) ETF. The fund has returned 14% so far in 2009 (it launched in 2008), and consists of inflation-linked bonds issued by countries like Canada and France. It's the only international inflation-linked bond fund, according to Morningstar.

They're not 100% correlated to currencies, but bonds of commodities-driven countries should strengthen in a recovery, while other should hold up in crises. As with TIPS in the U.S., the bonds' principal is adjusted in line with inflation, offering protection against interest rate risk.

Some exchange-traded funds do allow for direct investments in currencies, functioning as though investors are buying bank accounts overseas. While bonds and equities are generally better investments, these ETFs can be used as hedging tools, says Scott Burns, Kay's colleague at Morningstar. For people working abroad, shorting these ETFs could be one way to mitigate losses in wages incurred from currency translation.

But for investors who do want to directly bet on currencies, Morningstar says the most popular ETF with about $545 million in assets under management is CurrencyShares Japanese Yen Trust (FXY).

The fund invests in an interest-yielding Japanese bank account and provides "pure exposure to the yen's movements against the dollar," according to Morningstar. But it's "only suitable as a small speculative bet when not used for hedging purposes," Morningstar warns. The fund is up almost 16% over a one-year period and about 27% since its launch in 2007.

ETFs with a broader focus, such WisdomTree Dreyfus Emerging Currency (CEW), don't limit investors to a single currency. The WisdomTree fund is up about 6% since its launch in May, according to Morningstar.

Burns says these funds can also be used as hedging tools. Investors can go long on the equity performance of emerging markets while shorting the ETF to protect against losses again through currency translation. To top of page

Company Price Change % Change
Bank of America Corp... 30.26 0.09 0.30%
Netflix Inc 293.35 7.07 2.47%
Advanced Micro Devic... 31.14 0.33 1.07%
General Electric Co 9.04 0.14 1.57%
Ford Motor Co 9.11 0.04 0.44%
Data as of 6:30pm ET
Index Last Change % Change
Dow 27,025.88 23.90 0.09%
Nasdaq 8,156.85 32.67 0.40%
S&P 500 2,997.95 8.26 0.28%
Treasuries 1.76 0.01 0.51%
Data as of 8:18pm ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.