Forex Plays You Can Trade In Your Online Stock Account

Posted 06/05/2009, 9:00 am EST by The World Currency Watch Research Team from

Admit it.

When you hear the words “Forex trader,” you don’t picture yourself lounging in your home office, casually buying the euro or yen with a click of your mouse.

No, instead, you picture a sleep-deprived, family-dodging, adrenalin addicted, trade-aholic glued to his computer screen — constantly firing off bid and ask prices for random currencies you’ve never heard of at 4:00 A.M.

And trust us, those Forex trading junkies do exist. But what if you want to trade currencies — and you’re not interested in trading Forex every single day?

Fortunately, there is a way you can participate in the largest, most liquid market on earth… and still sleep like baby at night and even spend quality time with your family.

In fact, you can even buy and sell foreign currencies without a special Forex trading account and without any special training on a new trading “platforms.” You can even buy these in your IRA or other qualified retirement account.

In a regular (non-retirement) stock brokerage account, you can also trade many currencies with various strategies and levels of risk. For instance, you can trade currencies using no leverage (borrowed money) at all. Or, even if you don’t have a “margin account,” there are currency investments that will give you a little leverage (allowing you to control twice as much currency as you put up in cash).

Finally, if you do have a bit of trader’s blood in you, you can also trade these currencies with high leverage, in the form of options on currencies that trade right from your own stock market account.

These opportunities all begin with the introduction of one of the most innovative, cost-effective and possibility enhancing investment vehicles to come along in the last hundred years: the Exchange Traded Fund, or ETF.

The Perfect Vehicle for the “Non-Forex” Trader

ETF’s trade like closed-end funds on a stock exchange with some key exceptions. They usually are not managed. They simply follow a pre-determined index or the market price of a commodity — such as the value of a foreign currency. Hence, they tend to have miniscule expense ratios. In the case of currency ETF’s, these often range below 0.40% (four-tenths of one percent), comparing favorably to average expense ratios of about 1.5% for most managed domestic mutual funds.

Also, ETF’s tend to be very liquid and trade with tight spreads. And — since they operate like funds at the institutional level (for instance, redeemable for shareholders with 50,000 shares or more), they tend not to trade at large premiums or discounts to their net asset value (NAV). They’re transparent, easy to buy and sell and offer a great way to diversify out of a traditional portfolio of mostly stocks and a few bonds.

In short, as a “non-Forex” investor, you can purchase foreign currencies the exact same way you would buy a few shares of IBM or Coca-Cola on the NYSE. All you need is an online stock brokerage account (or if you prefer, a full-service stock broker who you can call with your request), and an introduction to currency ETFs…

A Look Inside a Currency ETF

Strictly speaking, most currency ETFs are actually investment trusts that hold physical currency in trust for all the fund’s investors. Similar to an index ETF, such currency ETFs are designed to track the underlying currency in dollar terms.

So for example, say you were bullish on the Japanese yen, so you bought a Japanese yen ETF. If the price of the Japanese yen rose, say, 10% versus the dollar, then your Japanese yen ETF would also rise about 10% in value.

Investors like currency ETFs because they are extremely liquid. Unlike mutual funds that only allow you to sell on certain days, you can buy and sell exchange traded funds anytime during all normal trading hours on the New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSX). A few currency ETFs are even available on the London (LSE) or Frankfurt Exchanges.

Such currency ETFs are extremely flexible and you can use them to play out several different investment strategies. You can use them to ride a short-term trend over just a few weeks, or even a long-term trend over a few years. In addition to flexibility and liquidity, currency ETFs can also offer you the chance to…

• Buy and sell-short in your standard stock brokerage account • Invest with no minimum investment • Use margin and enhance your leverage • Closely track the price of the underlying currency • Hold your currency ETF as long as you like — with no time premium or expiration

Also, currency ETFs (and indeed, all currencies) are NOT tied to any particular stock market. This means currency ETFs have the potential to rise even when the rest of the markets are crashing.

Case in point: In 2008, one of the worst years for stocks in decades, both the U.S. dollar and Japanese yen continued to rally as stocks crumbled. Any investor holding ETFs in either of these currency ETFs was rewarded.

But if you’re a U.S.-based investor, you may ask, “How can you hold a dollar ETF?” The answer is through an ETF that weights dollars against a basket of currencies. Or by shorting a particular foreign currency ETF. So, for example, if you short the British Pound ETF (FXB), in effect, you are going long the dollar versus the pound.

How to Buy or Short ETFs

The easiest way to purchase any exchange-traded fund is through an online broker or through a regular full-service broker. If you’re bullish on a particular currency, you simply buy an ETF that tracks that underlying currency.

If you’re bearish on a particular currency, the easiest way to short a currency ETF is to buy an inverse ETF. Otherwise, you’ll need a margin account to short that particular ETF, just as you would if you were to short a regular stock.

As we mentioned, you can also purchase most currency ETFs through an IRA or qualified retirement account, but please be aware that you can NOT short any ETFs with your standard retirement account. However, ask your broker about buying inverse ETFs because some will allow you to buy these shorting vehicles as long as they’re listed on the exchange.

Some brokers also allow you to use leveraged ETFs (like the “Ultra’s,” at 2-to-1 leverage in the list above) with a retirement plan. However, if you’re unable to buy leveraged ETFs in a retirement account, you should be able to buy leveraged ETF’s with any standard brokerage account.

But before you buy any ETFs for either your retirement, joint or other stock brokerage account, be sure to read the ETF’s prospectus to find out about taxable income, any fees, dividends etc.

To learn more about any of these ETFs above, you can visit the ETF providers individual websites at:

1. 2. 3. 4. 5.

For more on trading currency ETFs, you can check out our monthly newsletter, the Currency Capitalist. Each month, Chuck Butler, a 20-year veteran in the currency markets, tells you how to buy and sell ETFs and other long-term currency plays, so you can build a diversified portfolio far outside the volatility of the stock and commodity markets.