Are Forex Market ETFs Ablt to Offer Better Business Opportunities?
Forex market traders have been managing pretty good profits by taking advantage of the spreads between all-time low yields in certain areas, particularly developed ones, and high yields in a few other markets. Traders are increasingly using this carry trade strategy on forex market exchange traded funds (ETFs) to earn substantial amounts of money. As a matter of fact, ETFs provide traders with a relatively lower risk (but not risk free) avenue for trading since these funds help control the impact of the volatility of currency values on a forex trader’s portfolio.
So What are Exchange-Traded Funds?
ETFs are basically marketable security that is able to track a basket of assets like an index fund, bonds, commodity, or an index. They are not like mutual funds. EFTs trade like any common stock on the stock exchange. They also experience price changes all through the day as they are being bought and sold. In fact, they make for an attractive alternative for individual investors as EFTs usually have a higher daily liquidity and lower fees than the regular mutual fund shares. Since it’s traded like a stock, EFTs don’t need to calculate its Net Asset Value (NAV) at the end of each day, which is a common feature for mutual funds.
The carry trade involves borrowing in currencies with lower rates of interest in order to buy into markets that have higher yields. According to industry experts, this trade is set to show record gains this year. The trade has benefited immensely from government policies that have resulted in extremely low rates of interest. Central banks across the world have implemented relatively loose money policies this year, to the advantage of carry traders.
Many traders using the carry trade strategy would borrow on the Japanese yen because of its lower valuation so that they could buy Australian or New Zealand dollars which have a relatively higher yield. James Ong, Invesco’s senior macro strategist, admitted that their trading strategy was predominantly driven by the policies of central banks. The revised monetary policy of the Bank of Japan has been especially beneficial to the company’s trades. The decision to move away from a dollar centric trade policy has also helped the company tremendously.
Ugo Lancioni, an executive at Neuberger Berman Group LLC also endorsed this strategy saying that the Australian and New Zealand currencies have been very popular with traders even though other central banks have indicated that there will be additional cuts in the future. This strategy has worked very well thanks to capital appreciation. Furthermore, there are lots more currencies for traders to choose from, since many central banks in Europe have maintained attractively low interest rates.
A trader who is interested in trying out the strategy without entering the forex spot market directly can buy into the PowerShares DB G10 Currency Harvest Fund (DBV). The Deutsche Bank G10 Currency Future Harvest Index is made up of currency futures contracts on specific G10 currencies that include Canadian dollars, Australian dollars, New Zealand dollars, Norwegian krone, Swedish krona, Swiss francs, and Japanese Yen in addition to Euros, British pounds, and U.S. dollars. It has been devised to help traders take advantage of the relative values of high interest rate currencies to ones with low interest rates.
The DBV takes a leverage of two to one. It goes long on high yield currency futures and short on low interest currency rates. For instance, it is long 32.9% on the Australian dollar and 33.0% on the New Zealand dollar while it is short on the Swedish Krona and Swiss Franc, -31.3 percent and -31.5 percent respectively. At present DBV is performing higher 4.9% year-to-date and 8.7% higher when compared to the previous year.