About $3 trillion changes hands every day in the world currency markets. No, that’s not a mistake — it is trillion, with a "T."
So it must be profitable for someone. How can the small investor get in on it?
It used to be you had to open a special account for trading currencies. It can be a scary business, with wild, unpredictable ups and downs. If you’re an amateur, you have to be a very, very serious one, as currency bets are usually done for very short periods and must be watched constantly.
Now, it’s a bit easier, with the marketing of a handful of exchange-traded funds and notes that specialize in currencies like the Brazilian real, Australian dollar, euro, peso, yen and so forth. Many investors feel that betting on currencies is the next logical step in diversifying a portfolio.
Morningstar Inc. (Stock Quote: MORN) says about $6.2 billion was invested in the 28 currency funds at the end of March. Investors plowed about $3.7 billion into this relatively new class of funds in 2009.But maybe adding currencies to a portfolio is more trouble than it’s worth.
“Before rushing to purchase a currency ETF or ETN, it would be useful to evaluate the implicit currency bets that might already be lurking inside your portfolio,” writes Morningstar ETF strategist John Gabriel. “U.S.-based investors who own non-U.S. assets most likely already have sizable exposure to foreign currencies.”
Many financial advisers say U.S. investors should have between 10% and 40% of their portfolios in foreign stocks and bonds. Investors who use U.S.-based mutual funds, for example, invest with dollars, which are then converted to foreign currencies to buy foreign securities. When the fund shares are sold, foreign securities are sold, generating foreign currency that is then converted into dollars.
Changes in exchange rates can boost returns at some times, reduce them at others.