Be sure to see our list of 10 Mutual Funds for Hard-to-Reach Places.
How Currency Mutual Funds Can Be Used in a Portfolio
Many investors believe that currencies are more volatile than stocks, when in fact they have been historically less volatile. Furthermore, the combination of having a low volatility and low correlation asset in an investor’s portfolio can help when other asset classes fall in value. While there are no safe assets, the diversification benefits of currencies are hard to ignore.
Types of Currency Mutual Funds
Be sure to see the Beginner’s Guide to Asset Allocation.
Benefits of Currency Exposure
Below are a few other reasons to consider investing into the currency market.
- Crash Resistant
The currency market, unlike the equity market, cannot suffer a “crash” like the Great Depression or what was seen in 1987. In the currency market, any loss is offset by a gain of the counter-party.
- Low correlation
In addition to having low correlation with other asset classes, currencies also have low correlation with each other. For example, as the euro moves up against the yen, another currency may move down or vice versa. The benefit being that investing in more than one currency can have a positive risk-adjusted return over any single currency.
At any given moment, investors can easily see what the value of one currency is compared to another. This transparency helps keep bid-ask spreads narrow and the transaction cost involved in purchasing currencies low.
As previously mentioned, the currency market is the most liquid in the world and the only market that operates every single day of the year at any time of day.
Currency mutual funds not only give investors exposure to a low correlation asset to other assets, they also invest in a multitude of currencies that have low correlation to each other as well, further diversifying a portfolio.
Test your knowledge of foreign markets with our Quiz – Which Country Has a Higher GDP?.
- Political Risk
The market may factor political risk into currencies. Political changes or instability in a country can affect investment returns and the pricing of the country’s currency in the market.
- Monetary Policy Risk
This is the risk that a central bank may loosen or tighten the strings on its currency by stimulating the economy (lowering interest rates and weakening the currency) or try to reduce inflation by slowing the economy (raising interest rates and strengthening the currency)
- Foreign Exchange Risk
The risk of an investment’s value changing due to changes in currency exchange rates
- Fiscal Policy Risk
The government of a given country may decide to borrow money to stimulate the economy, or may decide to use tax-payers money to pay down the debt. In either case the effect on the currency can make it rise or drop depending on what the counterparty country’s policies are in comparison.
Any number of these can either help or hinder an investor’s returns, so do your due diligence before making any investment decision.
Most Popular Currency Mutual Funds
PIMCO Emerging Markets Currency Fund (PLMAX)
- Total Assets: $6.29B
- Expense Ratio: 1.25%
John Hancock Funds Absolute Return Currency Fund (JCUAX)
- Total Assets: $1.96B
- Expense Ratio: 1.53%
Eaton Vance Diversified Currency Income Fund (EAIXX)
- Total Assets: $664M
- Expense Ratio: 1.10%
Lord Abbett Emerging Markets Currency Fund (LDMAX)
- Total Assets: $514M
- Expense Ratio: 0.99%
Merk Hard Currency Fund (MERKX)
- Total Assets: $272M
- Expense Ratio: 1.30%
The Bottom Line
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