A Guide To Foreign Currency Mutual Fund Investing

Investing in foreign currency can be an exotic yet risky venture. The foreign exchange market is dominated by banks and institutional investors, but online brokerages and margin-trading accounts have made it more accessible. There are several benefits to investing in foreign currency, including the market's size and liquidity, the potential for diversification, extended trading hours, and relatively low costs. However, it's important to be aware of the risks, such as high leverage, high volatility, and the impact of economic reports and central bank interventions. One way to invest in foreign currency is through exchange-traded funds (ETFs), which are considered less risky than direct trading and can be purchased through traditional stockbrokers. Another option is to open a foreign exchange brokerage account and trade individual currencies directly, but this approach requires careful selection of a high-quality, regulated broker.

Exchange-Traded Funds (ETFs)

Currency ETFs are designed to track the performance of a single foreign currency against the US dollar or a basket of currencies. They are necessary for hedging purposes and can add to a portfolio's currency diversity. They can also be used as a hedging strategy against the relative value of a particular currency.

There are currently four main types of currency products available: open-end funds, grantor trusts, commodity pools, and exchange-traded notes (ETNs). Currency ETFs can be issued as registered investment companies (RICs) and are registered under the Investment Company Act of 1940. However, grantor trusts, limited partnerships, and ETNs are not registered under the 1940 Act.

When investing in currency-linked ETFs, it is important to consider the risks involved, such as volatile markets, rapidly fluctuating exchange rates, and the high cost of hedging. Additionally, international currencies can be volatile, and investing in foreign currencies exposes investors to the downside risks of other economies and regulations.

• Invesco DB US Dollar Index Bullish Fund (UUP)
• WisdomTree Bloomberg US Dollar Bullish Fund (USDU)
• Invesco CurrencyShares Japanese Yen Trust (FXY)
• Invesco CurrencyShares Euro Trust (FXE)
• ProShares Bitcoin Strategy ETF (BITO)

When investing in ETFs, it is important to consider factors such as expense ratios, fees, assets under management, fund performance, trading volume, and top holdings to align with your financial goals and risk tolerance.

Foreign Bond Funds

However, foreign bond funds carry certain risks, including interest rate risk, inflation risk, currency exchange rate risk, and geopolitical factors. These risks can impact the value of the bond and the returns for investors.

When considering investing in foreign bond funds, it is important to understand the risks involved and the regulatory and taxation requirements, which may differ from those in the investor's home country. Additionally, the credit ratings of the bonds should be checked to assess the level of risk involved.

Some examples of foreign bond funds include the Fidelity Global Credit Fund (FGBFX), the Templeton Global Bond Fund (TPINX), and the PIMCO Global Bond Fund Unhedged. These funds offer investors the opportunity to invest in a diversified portfolio of foreign bonds, providing access to foreign securities that may not move in tandem with local markets.

Global Funds

There are a few key differences between global funds and international funds. Global funds consist of securities from all parts of the world, including the investor's home country, whereas international funds consist of securities from all countries except the investor's home country. Global funds are chosen by investors who wish to diversify against country-specific risk without excluding their domestic market. The mix of domestic and foreign investments in global funds can work in the investor's favour if the global economy is performing well.

Country Funds

A country fund is a mutual fund that invests only in the securities of companies in one country. Although country funds can be diversified within sectors, they are concentrated in a single country, increasing their exposure to political risk. This means that country funds are subject to high levels of risk and price volatility, especially in emerging markets.

An example of a country fund is the iShares MSCI Israel ETF (EIS), which was the first Israel-focused country ETF on the market. This fund offers pure Israeli exposure, with 100% of its 112 holdings traded on the Tel Aviv stock exchange.

Additionally, currency risk is inherent in all country funds due to the exchange rate risk involved in holding foreign assets. Even if a country fund performs well in terms of capital gains, a loss can occur if the exchange rate moves against the investor.

Global Sector Funds

Variety of Investment Approaches

Access to Diverse Sectors and Regions

Long-Term Performance Potential

When considering global sector funds, look for those with strong long-term performance potential. Different funds will have varying investment styles and areas of focus, so it's beneficial to invest in a variety to balance your portfolio. Remember that past performance doesn't guarantee future returns, but a fund's track record can provide valuable insights.

Risk Considerations

Investing in global sector funds carries risks, including currency risk and political risk. Currency fluctuations can impact the value of your investments, and economic or political events in a particular country or region can affect your portfolio. Diversification can help mitigate these risks by spreading your investments across multiple countries and sectors.

Due Diligence and Advice

Before investing in global sector funds, conduct thorough research and due diligence. Understand the fund's investment strategy, performance history, and risk factors. If you're unsure, consider seeking advice from a financial advisor to ensure the investments align with your goals and risk tolerance.

Frequently asked questions