One mark of a successful investor is the ability to think
outside the box.
There is a never-ending opportunity for investors who remain
open to new horizons. Many investors get trapped with a myopic view
of the possibilities -- some only invest instocks , while others
are fearful of stepping outside of the United States in search of
Still, others have an irrational fear of certain investments
such as commodities or currencies, falsely believing only the most
sophisticated and well-heeled investors can understand these
markets. Well, the truth is today'sfinancial markets are globally
interconnected, making it sometimes necessary to step outside of
your comfort zone to find compellinginvestment opportunities.
With this edict in mind, I asked myself, ''What is the most
overriding theme in the globaleconomy right now?"
The answer is monetary easing by central banks worldwide. This
tactic of pumpingcurrency into an economy in an effort to
jump-start growth has become very popular. Monetary easing weakens
the currency and can often supercharge markets due to low interest
rates and improved borrowing conditions.
And nowhere is monetary easing more aggressively used than
Right now, the Japanese government has imposed heavy monetary
easing measures that are dramatically weakening the yen. In fact,
newly-electedPrime Minister Shinzo Abe has demanded the Bank of
Japan engage in unlimited printing of the currency.
In addition, Japan appears bent on lowering interest rates, even
if this means dropping them to below-zero levels. The reason for
this drastic action is because domestic consumption is dropping in
Japan. This means exporting needs to be ramped up to support the
economy. And the primary way to improve exports is by devaluing the
currency. As you can see from the yen chart below, actions by the
JapaneseCentral Bank spurred by the prime minister's words have
resulted in a steep decline in the currency.
Currency traders are making a killing shorting the yen right
now. In fact, there is no end in sight for the monetary easing
measures in that country. This means the yen is very likely to
continue to fall for the foreseeable future.
Whilestock investors can open aforex account to ride the
accelerating yen downtrend, exchange-tradedfunds (
) allow you to benefit directly from the falling currency within an
existing stock investment account.
There are two primary ETFs investors can use to captureprofit
from the yen's decline --
CurrencyShares Japanese Yen Trust (
ProShares Ultra Short Yen (
. The one you choose as your weapon of choice depends on
yourholding period and goals.
ProShares Ultra Short YenETF is a double leveraged inverse ETF,
which means that every tick in the yen is reflected as a two-tick
move in the ETF. But due to therebalancing required to maintain the
double shortleverage , this ETF is designed to inversely follow
theintraday move of the yen, not long-term. This means if you are
an active trader who can closely watch the ETF and perhaps even
close it out at the end of every trading day, then this ETF would
provide you with the most bang for your buck, though it is not
designed as a long-term investment.
The CurrencyShares Japanese Yen Trust is a plain vanilla ETF
designed to follow the yen without any extra leverage. However,
unlike the YCS, it's important to short this ETF to benefit from
the falling yen. It can be held short for the long-term without any
adverse effects, as there is no constant rebalancing of the
underlying instruments to maintain leverage.
Risks to Consider:
While it seems like a slam dunk that Japanwill continue to take
action to weaken the yen, anything can happen. Even a hint that
Prime Minister Abe is changing his position will cause a sharp
upward move in the currency. Investors who are caught short the yen
through ETFs or the currency itself could suffer sharp losses in
Action to Take -->
I expect the yen to continue its downward trend well into 2013.
Therefore, both of these ETFs are great investments right now. As
an active short-term trader, I would lean toward the ProShares
UltraShort Yen ETF for the benefits of the leverage. However, if I
were more of long-term investor, then my ETF of choice would be a
short position in the CurrencyShares Japanese Yen Trust. Remember
to always use stops and position size based on your risk tolerance