ETFs On Foreign Currencies
Raising money for emerging growth companies is not as easy as it sounds. Believe me. I spent a significant portion of my career running around the globe meeting with entrepreneurs and introducing investors. For a time I was based in London. That experience gave me a unique insight into the European continent.
While in London I learned a great deal about Indian food and fine French wines (among many other things). . . but that’s a story for another time.
More importantly I spent my time in London learning how institutional investors thought and what they focused on. I noticed one important constant. Every businessman and investor I met kept one eye on the US markets. It didn’t matter what their product was or what they were investing in – they all knew what was going on in the US.
Clearly the US economy has a big impact the world over. . . sometimes in ways we least expect it.
The Europeans I met with thought in very global terms. Let me give you an example. A few years ago I traveled with the management team of a leading alternative energy company raising money. Without exception every institutional investor inquired about corporate valuations.
Now, this is a very important question when raising money. If your valuation is too low you won’t raise enough. If it’s too high you might scare away all of the investors and not raise any.
Every European investor had extensive knowledge about valuations not only in their own markets but on a global level as well. In contrast, most US investors only focus on the US markets.
Like all things value is in the eye of the beholder
Relative valuations are important to understand. Today there is a major valuation trend occurring . . . and it directly impacts everyone living and working in the United States. What comparison am I talking about? Global currencies.
For the last seven years the value of the US Dollar has been falling. Now, you probably don’t think much about currencies but you should. The problem, or opportunity (depending on how you look at it), lies in the fact that as the value of the dollar falls, the cost of other products become more expensive. A declining US Dollar can lead to inflation and economic turmoil.
This is a nasty situation that could have a major long term impact on the US economy. But it’s also a trend that we can make money from.
Shifting a portion of your portfolio into international currency is a great way to hedge your US Dollar exposure. Investing directly in foreign currencies is easy. There are a number of currency ETFs that can easily be bought and sold right in your own trading account.
Specifically, look at the CurrencyShares ETFs. They created a number of different trusts each using US Dollars to buy a large amount of a specific foreign currency. When you buy the ETF you buy a portion of that trust.
The exposure you gain to these foreign currencies can be quite profitable. CurrencyShares offers several ETFs on various foreign currencies including Japanese Yen, EuroZone Euro, Swiss Franc, Canadian Dollars, British Pounds, and even the Australian Dollar.
All you need to do is anticipate which currencies will move higher against the US Dollar. Remember valuation is relative and some currencies move more than others. It’s important to understand not only relative values, but potential impacts from interest rate changes, economic data, and market performance.
In the next few weeks we will be launching a new currency trading service that takes advantage of these valuation trends. We monitor currency markets, anticipate economic data, and focus on finding undervalued currencies using both technical and fundamental analysis.
To say the initial trades have done well would be a huge understatement. Keep an eye on your e-mail for more information on this service (and the chance to get a discount as a DWR reader).
Category: ETFs
