Investors are being offered the chance to invest in the first exchange traded
funds to track the performance of currencies.
ETFs are like index funds in that they track the performance of an index,
share, commodity or currency but they are traded on the exchange in the same
way as stocks — meaning they are a cheap and transparent way to deal.
ETF Securities last week launched a platform allowing investors to bet on the
value of the 10 most traded currencies, which it refers to as the G10
currencies, including the euro, Japanese yen, sterling and the Australian
dollar, against the US dollar.
It is the first ETF to track currency in Europe and is the largest in the
world in terms of the number of currencies it allows investors to bet
against — the latest sign investors are increasingly keen on taking
advantage of fluctuations in currency.
Last week Killik, the broker, listed the Brevan Howard Macro FX fund on its
buy list. It aims to take advantage of changes to monetary policy and
currency movements around the world. “We foresee good trading opportunities
in currency markets over the next few years,” said Mick Gilligan, head of
equities at Killik.
Meanwhile Schroders, which launched its first currency fund in June, says
there is growing investor interest in playing the currency markets.
The foreign exchange market, though linked to an economy’s performance, does
not always correlate with stock market performance, making it a good hedge
against other assets. For example, Topix, the Tokyo index, fell 41% in 2008,
while the currency appreciated 71% against sterling.
Nik Bienkowski at ETF Securities said: “Currency ETFs are for investors who
want to diversify their portfolios with an asset that does not always
correlate with the performance of equities and bonds.”
However, the uncertainty makes for a difficult investment strategy. Adrian
Lowcock of Bestinvest, the adviser, said: “Just because you can do something
doesn’t mean you should.” Here we explain the new ETF:
How does it work?
The currency ETF allows investors to either “go long”, where they bet the
price of a currency will increase against the dollar, or “go short”, where
they predict the value will fall.
There are 18 exchange traded contracts (a type of ETF) — nine for long
positions and nine for short positions. Each trade is charged at 0.39%. The
performance is based on the Morgan Stanley FX indexes launched this year.
They track the fluctuation of currency but factor in local interest rates as
well.
“It’s as close to buying a currency and placing it in a local bank account as
you can get without buying the currency,” said Bienkowski.
It means that even if the US dollar strengthens against the Australian dollar,
you still benefit from the higher interest rates in Australia. The
Australian central bank has a rate of 3.5% compared with a range of 0%-0.25%
for America.
The money you invest is held by Morgan Stanley, which uses the cash to buy a
mix of equities and bonds to hedge risk.
What should I go long on?
Countries that rely on exports, such as Australia, Norway and Canada, are
likely to benefit most from global recovery as demand for their products
increase. Australia, a big iron ore and gold exporter, recently became the
first of the G10 currency countries to raise interest rates, from 3.25% to
3.5% this month, following a rise of 0.25 percentage points last month.
It was followed by Norway, an oil exporter. It raised interest rates by 0.25
percentage points to 1.5% in October. Canada, which also exports oil, and
benefits from its close trade ties with the US, is tipped to follow suit.
Chris Saint, currency specialist at Hargreaves Lansdown, the adviser, said the
Australian dollar was benefiting as investors looked to take advantage of
higher interest rates.
“There is talk among investors that another rate increase may be announced
before the end of the year. There is also speculation that the US dollar and
the Australian dollar could reach parity,” he said.
The Australian dollar fell to a low of A$0.63 to US$1 in March and is now
about A$0.93. Over 12 months it is 46% up against the US dollar. However,
Bill O’Neill at Merrill Lynch, the investment bank, said: “The rapid rise
could lead to a correction if the recovery stalls.”
What should I go short on?
Saint said the US dollar slide would continue as investors sold out for
higher-yielding currencies. The same applied to the yen and Swiss franc,
which are regarded as safer during instability. Gabriel Stein of Lombard
Street Research said interest rates were unlikely to change in these
countries until at least the final quarter of 2010.
Saint also thinks sterling will remain weak. Over the past year, it has
experienced its worst slide since 1931. “Low interest rates, a continued
stimulus package and huge government debt will mean UK interest rates could
remain low for longer than other G10 currencies. Greatly improving data
showing economic recovery is needed for sterling’s fortunes to appear any
more favourable.”
David Clements at Caxton FX, the currency firm, disagrees. “One of the most
popular trades among investors is selling the Australian dollar and buying
sterling,” he said.
“Much of the bad news has already been factored into the price of sterling.”
Are there other options?
The ETF allows trading with only the G10 currencies but some suggest greater
returns can be found farther afield.
Clive Dennis, manager of the Schroder Global Managed Currency fund, said: “We
strongly believe that a G10-focused approach is limited as, historically, a
lot of value has been generated by emerging market currencies.”
He uses an index, devised by JP Morgan, that tracks a basket of 34 currencies,
weighted by the total gross domestic product in that country. The US dollar
accounts for 27% of the index and the European Union has about 24%. Emerging
markets account for about 30%.
Gilligan said countries where the currency was pegged to the US dollar, and so
artificially cheap, might also be a good play in the long run.
“Both China and several Middle Eastern countries such as Abu Dhabi and Qatar
artificially lower their currency to benefit their exporters. In the long
run, it is expected that these pegs will be removed, so the value of their
currencies will shoot up,” he said.
It is difficult for retail investors to invest in these currencies but
Gilligan recommends funds that benefit from the market performance of these
countries. He suggests the First State China fund or the Epicure Qatar
Opportunities fund.
Can’t I just buy the currency?
If you want simply to buy currency, one of the best ways is to use a currency
specialist, such as Caxton FX. It allows purchases of 17 currencies,
including those of the G10.
Currency can also be bought over the internet, although there are limits of
between £100 and £10,000. There is no fee but there is a margin over the
wholesale price. Last week, you could get US$1.62 to the pound, but the spot
price was US$1.65.
A better rate can be obtained over the telephone, though the minimum trade
will be £5,000. However, a rate of $1.64 is available in this way.
Your Comments
Order By: