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Are Currency ETFs Zero-Sum Speculation or a Hedge Against Risk?

NEW YORK (TheStreet) -- It wasn't always easy to invest in currencies.

But now exchange-traded products offer access to asset classes that previously could not be accessed through brokerage accounts, including currencies.

Currency funds first hit the market in in 2005, when Rydex (since acquired by Guggenheim), created the CurrencyShares Euro (FXE). That was then followed by CurrencyShares for several other currencies in the ensuing months.

The belief back then was that the dollar had to go down. The new currency funds offered a form of diversification for a dollar-based portfolio.

The concept was immediately popular, as the dollar was dropping against some of the major currencies in what many at the time believed was a one-way trade. In one stretch from late 2005 into 2008, the dollar fell 25% against the euro and 12% against the British pound. In 2007, CurrencyShares announced the FXE had amassed over $1 billion in assets.

Since then, the euro and other major currencies stopped being a one-way trade and turned into a less predictable, short-term trading vehicle.

FXE bled assets. Now, according to, it has only $210 million in assets.

The currency fund with the most assets now is the CurrencyShares Australia Trust (FXA) at $325 million, probably because of FXA's relatively high trailing yield of 1.98%. Still, over the last year it is down 12% more than its offsetting yield.

The reality is that exposure to a single currency is closer to a zero-sum speculation as opposed to an investment. While speculation is of course valid, it may not be what all investors want to do.

One form of currency exposure that could work more effectively to diversify a dollar-based portfolio are ETFs that offer exposure to baskets of currencies.

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