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I've found myself fielding the same question a number of times recently: What's the best way to get foreign currency exposure? Increasingly, I've been replying the same way: Just buy the currency ETFs. Roger Nusbaum has done a good job of describing these vehicles , so I'll skip the basics. The point of this article will be to uncover whether some are more desirable than others for gaining such exposure.
Counting the Cost
Let's say someone wanted to buy the British pound. Investors can buy CurrencyShares British Pound Sterling ( FXB), an exchange-traded fund; buying one share of this fund is the equivalent to owning 100 pounds. Currently, this ETF yields about 4.4% and carries an annual expense ratio of just 40 basis points (0.4%), which compares quite favorably with other nondollar cash vehicles that have become popular of late. For example, Everbank, a primarily Web-based bank with trading operations in St. Louis, had a big hit on its hands in recent years with its foreign currency CDs. Investors who wanted such exposure could get it through certificates of deposit denominated in various currencies, and in some cases they could capture a nice yield to boot. The emergence of the foreign-currency ETFs, however, makes those CDs look awfully expensive now. Everbank's 12-month British pound CD, for example, currently yields 4.25%, less than that of FXB. Adding dramatically to the expense at Everbank is the fact it will charge you 0.75% just to convert your dollars into pounds on the way in and on the way out! Translation: The bank effectively lops 1.5% off its product's stated rate for a net yield that falls to little better than half that of FXB, an enormous price difference for a cash-type holding. In addition, the FXB is liquid daily because it trades like a stock.