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New Ways to Track Currencies

Kevin Baker

Exchange-traded fund investors got three more ways to play the currency markets earlier this month.

On Feb. 13, the CurrencyShares Japanese Yen Trust (FXY Quote) was issued for trading. Then on Feb. 20, the PowerShares DB US Dollar Index Bullish Fund (UUP Quote) and the PowerShares DB US Dollar Index Bearish Fund(UDN Quote) launched.

The CurrencyShares Japanese Yen Trust is managed by Rydex Investments, and it rounds out Rydex's portfolio of currency ETFs including the CurrencyShares Euro Trust(FXE Quote), the CurrencyShares Australian Dollar Trust(FXA Quote), the CurrencyShares British Pound Sterling Trust(FXB Quote), the CurrencyShares Canadian Dollar Trust(FXC Quote), CurrencyShares Mexican Peso Trust(FXM Quote), the CurrencyShares Swedish Krona (FXS Quote) and the CurrencyShares Swiss Franc (FXF Quote). The funds measure the value of the foreign currencies in U.S. dollars.

When a foreign currency strengthens, it takes more U.S. dollars to buy one unit of that currency. So if you believe that the U.S. dollar will weaken against one these currencies, buying the ETF for that currency gives you protection from a fall in the value of the U.S. dollar. Of course, if the dollar gains in value, these ETFs are designed to fall.

If you have the notion that the U.S. dollar is going to rise in value, but are unsure as to which foreign currency to bet against, then take a look at the PowerShares DB US Dollar Index Bullish Fund (UUP Quote) offered by Deutsche Bank and PowerShares Capital Management. This ETF holds a basket of the six currencies that make up the dollar index: euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

In the last few days, the dollar has weakened, so investors were better off holding the PowerShares DB US Dollar Index Bearish Fund (UDN Quote) that goes up when the dollar sinks. Chalk that up to currency traders agreeing with former Fed Chairman Alan Greenspan's comments on excessive U.S. debt and the potential for a U.S. recession by year-end.

Two sector ETFs also debuted earlier this month: the First Trust Nasdaq-100 Ex-Technology Sector Index Fund (QQXT Quote) and the First Trust Nasdaq Clean Edge U.S. Liquid Series Index Fund (QCLN Quote).

The Nasdaq Clean Edge U.S. Liquid Series Index Fund tracks 45 clean energy stocks with a sector breakdown of 43.9% semiconductors, 19.6% alternative energy, 13.2% electrical components and equipment, 7.8% electronics, 4.3% manufacturing and 3.9% machine tools.

The fund's largest holdings include MEMC Electronics (WFR Quote), Linear Technology (LLTC Quote) and Suntech Power (STP Quote). Al Gore winning an Oscar for An Inconvenient Truth is a sign that a global focus on clean energy improves the outlook for these types of stocks.

And for the few remaining Luddites, the Nasdaq-100 Ex-Technology Sector Index Fund purports to follow all the members of the Nasdaq 100 that are not classified as technology stocks. On top of the 13.7% retail and 10.4% media concentrations, the fund actually does hold high-tech industries, including 10.4% internet, 9.0% biotechnology, 8.7% pharmaceuticals and 7.8% telecommunications.

Holdings such as Level 3 Communications (LVLT Quote), EchoStar(DISH Quote) and Garmin(GRMN Quote) seem pretty high-tech to me. Microsoft (MSFT Quote) was correctly excluded, but another software company, Electronic Arts (ERTS Quote), remains in the basket. Some investment concepts I just don't get.