by Andrew Horowitz

Before my series on starting 2010 off right we were talking about foreign exchange markets and currencies. In this article, we will be discussing how to use exchange-traded funds to allow you to broaden your portfolio and invest in currencies without ever having to learn or trade Forex.  It's as easy as buying any other ETF, which is to say, it's as easy as buying a stock!

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In an earlier article, we talked about the U.S. Dollar Index and how watching it can be useful for investors because it allows them to see the strength or weakness of the U.S. dollar against other foreign currencies.  But you can't really trade the pure U.S. Dollar Index--just like you can't really trade the Dow Jones Stock Market Index.

The U.S. Dollar Currency ETF

However, with ETFs, you can.  Remember that you can trade or invest in the Dow Jones Index ETF; its symbol is DIA.  Not surprisingly, the most liquid ETF that investors use when they want to buy the U.S. Dollar Index trades under the symbol UUP.  That's easy to remember!

So, if you want to see what the U.S. Dollar Currency ETF is doing, look up symbol UUP in your favorite online financial website. It will tell you the most recent quote and current trend as well as other information about the USD exchange-traded fund.  To buy the dollar index, you can buy a share of UUP!  Remember from my last article that the U.S. Dollar Index is a basket of six foreign currency pairs with the U.S. dollar, which gives a broad idea of how the US Dollar is doing against foreign currencies.

When Should You Invest in a U.S. Dollar ETF?

I.S. dollar is going to be stronger against foreign currencies over the next few months or years adding a U.S. Dollar ETF to your growing portfolio.So if you think that the U.S. dollar is going to be stronger against foreign currencies over the next few months or years, you might want to consider adding a U.S. Dollar ETF to your growing portfolio.  But what if you want to diversify by investing in foreign currencies that you think will rise relative to other currencies?  That's when you will want to learn all about foreign currency ETFs!

What are Foreign Currency ETFs?

The most liquid and common currency ETFs are known as "CurrencyShares" trusts and often trade with the first two letters of the ETF being "FX."  It makes sense if you think about it--the FX is a shortened way to say Forex--and sometimes the Forex market is referred to as the "FX" market.  There's a lot of lingo we use in the investment world, and it's not hard to learn, but it takes time to get used to.

Anyway, other than the U.S. dollar, the second most common currency ETF is the euro, which trades under the symbol FXE.

To see how the euro is performing relative to a basket of other foreign currencies, including the U.S. Dollar Index, you would type symbol FXE into your favorite website. Then you’ll be able to see information and prices on the CurrencyShares Euro Trust.  As always, be sure to read the prospectus and all information you can on an ETF before investing, including knowing what the expense ratios and fees are in advance.

Maybe you want to gain international exposure to the British pound.  To do that, you would invest in the ETF under symbol FXB, for the "British Pound Sterling" trust. 

Other Currency Shares Symbols

The other symbols for the CurrencyShares trusts are the following:

  • Japanese yen: symbol FXY

  • Canadian dollar: symbol FXC

  • Swedish krona: FXS

  • Swiss franc: FXF

And you can even invest in our neighbor to the South - the Mexican peso: symbol FXM.

Why Add Foreign Currencies to Your Portfolio?

Why would you be interested in adding foreign currencies into your portfolio?

Well, to start with, there are four major asset classes:

  • stocks

  • bonds

  • commodities

  • currencies. 

Most people are familiar with stocks and bonds--that's the easy part.  It's also easy to understand gold and oil and other commodities like rice, silver, wheat, corn, and orange juice.  We can easily visualize these commodities and can understand their prices--a rise in crude oil translates into a rise at the gas pump--and that's no fun! 

But sometimes it's hard to wrap our mind around currencies and how they fit into a winning portfolio.

The purpose of these currency exchange-traded funds is to open up a whole new world of investing that allows you to diversify your investments away from the U.S. dollar.

Investors do this as they want to gain exposure to other currencies to ensure that they can maintain purchasing power in the event that the dollar declines in value.

Be sure to read up on these funds to learn more, and keep with us as we discuss even more ways to become a winning investor in our next podcast! If there’s a question you’d really like to ask, just email me at winninginvestor@quickanddirtytips.com 

And if you like the show, tell a friend or leave a review on iTunes. Until next time, this is Andrew Horowitz with The Winning Investor’s Quick and Dirty Tips for Making money in any market  wishing you all the best on your quest to investment success.