ETF Expert

I received an e-mail from a concerned reader. He said, "Why would anyone invest in a currency? Aren't they exceptionally volatile? Couldn't they collapse or become worthless?"

The idea that currencies are volatile comes from a number of currency crises in the past. There have been times when the Russian rubble or Thai baht or other emerging country's paper has completely collapsed. However, developed markets from Australia to New Zealand to France to Canada haven't been regarded as reckless paper printers.

(Yes, I know. We can debate the recklessness of the U.S. government's paper printing till the oceans run out of fish. However, at least for the moment, it's worth noting that alternative currencies may be used to hedge against a falling dollar.)

For example, if you're troubled by the notion that your investments are too exposed to a falling greenback, or if you are worried about the U.S. dollar's status as the world's currency reserve, the CurrencyShares Australia Dollar (FXA) may be an effective hedge. And here's why:

1. Australia's Economic Recovery. One of the last economies into the global recession… one of the first out. CurrencyShares Australia Dollar (FXA) is a less risky, less volatile way to invest in the potential success of the Australian economy… which is based largely on basic materials and natural resources. China's numerous deals with Australia, and the former's interest in acquiring commodities or commodity companies, is giving a legitimate boost to the country's well-being. Consequently, many view the currency as a safer haven than the U.S. dollar.

2. CurrencyShares Australia Dollar (FXA) Technical Uptrend. In early March, FXA entered a short-term uptrend, at about the same time that stock markets began snapping back from miserable, multi-year lows. In late April, FXA had entered a long-term technical uptrend, as the price had moved above its 200-day moving average. By mid-May, chart-followers were further validated by the 50-day trendline crossing above the 200-day trendline.

3. Carry Trade. The return of investors borrowing from low interest rate countries like the U.S. and Japan and investing in higher yielding currencies like Australia and New Zealand also bolsters the case for appreciation in FXA; moreover, as a hedge against a falling U.S. dollar, Australia's dollar is often purchased, which is yet another reason for an expectation for appreciation.

Currencies can also be used for income as well as potential appreciation. If nothing happens for the Australian dollar versus the American dollar, you can still pick up income. CurrencyShares Australia Dollar (FXA) offers a 4.6% annualized stream.

There's another way to get carry trade results. The PowerShares DB G10 Currency Harvest Fund (DBV) tracks an index that shifts the choice of currency holdings based on the yield of the ten top world currencies — the G10.

(Read more about the PowerShares DB G10 Currency Harvest Fund (DBV) here.)

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") thatmakes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.