Foreign Exchange ETFs in Portfolio?

[Newman]

I have been thinking about including some foreign exchange ETFs in my portfolio for some time now. I'd like to get some opinion on this to see if it's actually a good idea. I have been reading that it's better to be well diversified and how large the forex market is, so I thought this would be a decent place to start. I've already got positions in equity and bond ETFs, so I'm covered there. I think I'm well diversified already, but I always want more. Any help would be appreciated.

 

[WendyMay]

If you're looking to invest in currency ETFs, you better know what you're doing. They can be wildly volatile, but I would say that perhaps a small holding would be okay, especially if you're looking to diversify away from the U.S. dollar. Currencies go up and down, get stronger and weaker and I'm not sure the dollar will be around for too much longer. It may not be a bad idea to get away from it a little. Especially since so many equities and bonds are U.S. dollar denominated. The question is, which currency ETF do you buy? I don't have the answer for that. I'm not sure if there's a "basket" of currencies to use as a hedge. You'll need to find that out.

I used to trade currency ETFs a little about a decade ago. I can remember buying some Canadian Dollar (FXC), Australian Dollar (FXA), Swiss Franc (FXF), and Chinese Yuan (CYB). Some of these actually gave me a scheduled return. I don't think it was a dividend, so it must have been some sort of capital appreciation. I didn't lose any money on these funds, but after a while I felt as though I was being a speculator as opposed to an investor. And foreign exchange ETFs certainly part of my portfolio that I'd rebalance every so often.

Overall, there are some positive aspects of the currency market. It's very large and liquid, it can help you diversify away from the U.S. dollar, you can trade shares 24 hours a day (I'm not sure about that for the ETFs), and it's relatively inexpensive (again, I think ETFs have the same trading commission as any other ETF). There are also some risks involved with currency trading. It's a high leverage sport and it can be very volatile. So if you do anything, I would definitely stick with the ETFs as you suggested and stay away from diving straight into the forex market.

 

[EmeraldHike]

I like to hold some foreign currency ETFs in my account to hedge away from a weakening dollar. I don't stop with these though. I also hold commodity, gold, and inflation protected bond ETFs. In this financial environment, I think it's critical to start thinking away from the United States. I'm not sold on the fact that the U.S. dollar will be around forever. When inflation begins, you'll thank your lucky stars that you put measures in place to hedge against that inflation. I'm not exactly sure that foreign currencies will completely protect me since everything is somehow connected to the dollar, but it can help. I do know that commodity prices and the price of gold will rise during inflation though, so I'm banking on that. And I should make some money on my TIP ETF if inflation goes nuts. Stocks in general will follow behind and rise as well, but that can take a while to happen. I hear that equities do rise in an inflationary environment, but they lag a lot. Prices really have to rise a lot for them to show in stock prices.

If you do invest in these ETFs, make sure you understand the tax situation. If you are going to purchase these in a taxable brokerage account, I believe that they'll be taxed as regular income for both short and long term gains. Some currency ETFs do offer a return though. It's based on interest rates. Just be sure you know what you're doing. And remember, these things don't grow like stocks do. They don't give dividends. They're meant to make money as a trading vehicle and they're meant to be used as hedges against something else.