ETF Expert

It’s only natural for American investors to focus on the U.S. dollar. It’s not arrogance… it’s what we know. (It’s the same reason that most U.S. citizens only speak English.)

It follows that the most popular Currency ETFs involve shorting U.S. dollar futures — ProShares DB Dollar Bearish (UDN) — and going “long” U.S. dollar futures — ProShares DB Dollar Bullish (UUP). For most of 2009, UDN received most of the attention as a way to invest in the “inevitable” decline of the U.S. dollar. Post Dubai, however, investors perked up to the possibility that the U.S. dollar could spike on a worldwide crisis or gain ground on “superior” developed country GDP growth.

Yet I contend that investors should watch the actions and comments of central banks around the globe. For instance, Australia’s responsible, yet gradual, approach to rate hiking has contributed to the consistent performance of Currency Shares Australia Dollar (FXA). It’s back above its short-term 50-Day MA after a post-Dubai shake-up in currency trading.

Of course, some investors might find that exposure to the Currency Shares Australia Dollar (FXA) is far more volatile/risky than they had bargained for. Having the highest yield of the G-10 has made the Aussie dollar the focus of the yen carry trade as well as the U.S. dollar carry trade.  When your intent is to reduce the risk of stocks, you may not be comfortable with 40% capital depreciation (e.g., last 3 months of 2008) or 50%+ capital appreciation (e.g., last 9 months of 2009).

What are other central banks signaling? China raised rates on their short-term treasury bills last week. While that might have momentarily chilled emerging economies vis-a-vis a fear of stimulus removal, WisdomTree China Yuan (CYB) quietly gained ground. Plus, CYB was an exceptionally stable investment throughout the ups and downs of 2008-2009.

And then there’s the possibility of investing in the Canadian Dollar. While U.S. fed funds futures are signaling a likelihood of a year-end target of 0.75%, a similar gauge for Canada’s rate policy anticipates 1.25% by December 2010. BMO Capital Markets also believes that Canada will hike rates in July, whereas the U.S. may be “on hold” until September. If Canada acts first, and tightens a little quicker, one might expect the CurrencyShares Canadian Dollar (FXC) to maintain its uptrend.

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. If you’d like to subscribe to ETF Risk Alert, click here.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.