The recent Morningstar ETF investment conference found Merk Investments founder Axel Merk arguing for the inclusion of currencies in the average investor’s portfolio. He stated a number of benefits to investing in currencies, such as the potential of risk-adjusted returns in the near future, and how strategies using these investments offer low correlation to the usual bonds and stock market investments. In addition, Merk also said that investors who wish to use bond funds as a financial buffer may suffer from losses due to possible interest rate increases, as well as a bubble burst. Although these arguments seem convincing, many investors are unaware of currency investment options, as well as the actual performance of these tools.
The international exchange markets’ daily turnover, says the Bank for International Settlements, averages near $ 4 trillion, without the contract volume of exchange-traded currency futures. The above-par liquidity of the asset class makes it a good fit for investment vehicles, like exchange-traded funds and mutual funds, which allow frequent redemptions. Morningstar’s category for currencies includes 15 individual mutual funds and 31 ETFs. 10 out of 15 of these mutual funds are managed actively, while all but a couple of ETFs use strategies built around passive index-tracking – investors need an investment thesis of some form here.
Passive funds are leveraged twice, at a maximum, while ETFs lead in high-yield currencies and fall back in low-yield currencies. “Carry” strategies, such as those followed by the active ETFs, are also incorporated into mutual funds that are actively managed, although they may be combined with valuation or momentum strategies. Mutual funds that have been around longest, however, are also aiming to profit from the fall of the US dollar.
Examining currency funds for an investment portfolio can be complex. Aside from the fact that these tools follow various strategies, many are also comparably new. Before 2005, only a single ETF or mutual fund existed, and relatively few have lasted for five years. Before buying in, consult with an investment professional or financial advisor.
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