ETF Talk: Dialing For Dollars With Currency ETFs

Anybody who’s ever invested money in the financial markets has probably received an unsolicited call from a stockbroker trying to get him or her to open up an account with that broker’s firm. This common practice of making unsolicited calls to prospective clients is known in the industry as "dialing for dollars."

But now that the value of the U.S. dollar versus rival foreign currencies seemingly has become a one-way ticket to Palookaville, investment firms are dialing for dollars in a whole different way.

To take advantage of the dollar’s decline — and the widespread interest it has engendered with investors looking to speculate in the currency markets — many exchange-traded fund (ETF) issuers have come out with new ETFs designed to help investors dial-up profits from the direction of the dollar and its rival foreign currencies.

Just last week, the first five WisdomTree Dreyfus Currency Income ETFs began trading on the NYSE. These ETFs caught my eye because they are aimed at earning current income intended to equal money market rates available to U.S. investors in the specific country or region that is the focus of each fund.

The four new WisdomTree Dreyfus ETFs are classified by the SEC as "actively managed" funds that seek to provide exposure to changes in the value of a designated non-U.S. currency, compared to what has been a devaluing U.S. dollar. To my knowledge, these currency funds have the distinction of becoming the first actively managed funds in this sector. This active portfolio management should allow for heightened investment flexibility.

Each fund will invest in short-term, investment grade financial instruments but none of these new ETFs should be considered money market funds. Nor will the funds maintain a constant share price, so risk of losing principal certainly is a concern.

With the U.S. dollar showing no signs of strengthening and remaining under pressure to weaken from further U.S. interest rate cuts, now is a good time for you to become familiar with these WisdomTree Dreyfus offerings. Three of the funds are aimed at riding currency appreciation in the fast-growing economies of Brazil, China and India, respectively. The fourth is a bet on the Euro, while the fifth is a play on Japan’s Yen.

WisdomTree Dreyfus Chinese Yuan Fund CYB
WisdomTree Dreyfus Indian Rupee Fund ICN
WisdomTree Dreyfus Brazilian Real Fund BZF
WisdomTree Dreyfus Euro Fund EU
WisdomTree Dreyfus Japanese Yen Fund JYF

These funds may be of particular interest to investors looking for portfolio diversification. With stock markets around the world generally rising and falling somewhat together, currency investments are a way to provide a bit of balance and to avoid overexposure to equities.

For many of you, currency investing may be a little outside of your comfort zone. Stocks and bonds likely are most familiar to you. I also recognize that investing in U.S. dollar-denominated money market funds may be easier for you to understand than currency ETFs. But if you are seeking alternatives to the low yields and the depreciating purchasing power that have occurred with the U.S. dollar in recent months, you may want to consider currency funds.

However, there are some unique risks to currency investing that I want to bring to your attention. The potential loss of principal definitely is a risk. Another risk is currency fluctuation. Although the U.S. dollar has been weakening, it may recover either short term or long term. Political and economic risks also are considerations with currency investments. Events and developments in specific regions and countries are magnified when you hold assets in funds that invest in those places. Other risks with currency investments include credit risk, interest rate fluctuations, and derivative investment risk.

If these risks seem too daunting, stay clear of currency ETFs. But if you want the diversification currency ETFs offer, you may want to take the plunge. I personally am not recommending any of the currency ETFs right now, but I do like the income-generating component of the WisdomTree Dreyfus funds.