How To Make Money From A Weaker Euro Using ETFs
The U.S. economy has been growing at an anemic rate; yet compared to Europe, it is doing great. If they are not there already, many economies in Europe are on the brink of recession. In fact, the largest euro-zone economies, Germany, France, and Italy, all contracted during the second quarter.
No wonder Mario Draghi, president of the European Central Bank, is worried. He had largely avoided extreme measures, such as quantitative easing, which his counterpart, Ben Bernanke, implemented in the U.S. Yet just as Janet Yellen and the Federal Reserve are bringing QE to a close in the U.S., the European Central Bank is about to begin its own QE program.
The Fed is expected to stop buying Treasury bonds and mortgage-backed securities in October. While it has not said exactly when it will begin to raise interest rates, most economists are expecting it to begin increasing the fed funds rate in early 2015. So just as the U.S. central bank is about to tighten the money supply, the European Central Bank is loosening.
The inevitable result will be higher interest rates in the U.S. and lower interest rates in Europe. This is why the euro fell today to its lowest level against the dollar in 14 months. One euro now costs just $1.29. Back in May, it was close to $1.40. A weaker euro is good news for U.S. consumers and European companies hoping to export more goods to the U.S. A weaker euro is bad news for U.S. companies that rely on European sales.
While there is no guarantee that the euro will keep falling, many investors expect it to do just that. Investors wishing to profit from a continued slide in the euro can do so by using exchange-traded funds (ETFs). The FXE is an ETF that tracks the euro. It goes up when the euro strengthens and it goes down when it weakens. So if you expect the euro to keep falling, you would short the FXE. This ETF has an expense ratio of just 40 basis points.
The EUO is an double short euro ETF. In other words, when the euro falls, this ETF goes up by twice as much. Of course, the opposite would be true if the euro strengthens. You would go long the EUO if you expect the euro to keep falling. However, this ETF has a hefty management fee of 95 basis points. If you expect the dollar to strengthen not just against the euro, but against a basket of five other currencies (Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc) as well, you can go long the UUP. This ETF, which takes a long position in USDX futures contracts, has an expense ratio of 80 basis points.
Read Vahan’s blog at www.janjig.com.