Insurance or gambling?
With the flexible trading that exchange-traded funds offer, currency ETFs are easy to buy and sell whenever the markets are open. That makes them easy to use for speculation as well as for legitimate attempts to hedge U.S. dollar exposure.
But with recent trends in the global economy, the line between speculation and hedging has become very blurry. Rhetoric from world leaders, especially among emerging markets, about the need to replace the U.S. dollar as the world’s reserve currency has become a lot quieter lately, especially as the dollar has risen dramatically in value against the Japanese yen over the past year. Still, as budget debt balances in the U.S. continue to rise, it’s easy to envision a situation in which reducing the value of the dollar benefits the government in handling its debt — while hurting those investors who rely on the dollar maintaining its value.
New ways to play
With the introduction of the PIMCO Foreign Currency Strategy ETF, an actively managed fund that will use various analytical tools to decide which currencies to target for maximum exposure to better returns as well as protection against a future dollar decline, interest in currency ETFs is likely to soar in the weeks and months to come. But the long-term viability of currency ETFs depends on their ability to provide better returns than U.S. dollar-denominated assets. Given the steady decline in the dollar’s value for decades, that seems like a reasonable bet for the future as well.
The article Currency ETFs: A Smart Way to Play Dollar Devaluation? originally appeared on Fool.com and is written by Dan Caplinger.
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