Currency Etfs DIRECT

Previous to currency linked ETFs becoming available, investing in those markets for retail investors was as difficult as with commodities. The only route for individual investors was through previously outlined expensive and leveraged commodity and futures pools. Currency trading was the domain for large banks and other institutions accustomed to dealing with large sums daily in the inter-bank market.

Taking the lead in currency ETFs was Rydex Investments. They launched a series of ETFs including:

■ Rydex Australian Dollar ETF [FXA].

Why are these important? In the first place they're necessary for hedging purposes. For example, in 2005 the Nikkei 225 Index in Japan gained nearly 40 percent, but Japan ETF [EWJ] gained 20 percent. While a respectable return for the ETF, naturally an investor would like the return of the index more. The difference was the value of the yen, which had deteriorated by an equal amount. So if FXY had been available the investor could have shorted it in an appropriate amount to hedge yen currency risks.

Finally, our DB friends have issued a very important bullish UUP and bearish UDN Dollar Index series. This really allows investors to hedge or speculate against a rising or falling U.S, dollar. It's an extremely important issue for investors since there is continued and widespread conjecture that the U.S. dollar may fall sharply at some point. If investors wish to protect themselves or profit from such an event, how would they do it without the benefit of UDN?

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