Forex Without The Fuss

Exchange-traded funds offer a much easier way to invest in the currency market.

The stock and bond markets continue to make a mockery of most advisors' best-laid plans. Not so here: Forbes ETF Advisor's portfolios are faring relatively well--losing less in order to accelerate our gains when the road runs straight.

Meantime, one of our most successful stakes last year remains in fine fettle this year, despite several reasons that ought to have upended it. Which stake am I talking about? The PowerShares Dollar Bull (nyse: UUP) has been (and remains) our play on a weakening global economy and a ratcheting up of fear on a global scale. Our other smart move last year was the iShares Gold Trust (amex: IAU).

In Pictures: 10 Currency ETFs

Now, as we wend our way through this year, I suspect we'll find uses for other currencies; right now I think CurrencyShares Canadian Dollar (nyse: FXC) is an attractive way to diversify a stake in the as yet unseen recovery. It trades on a relative multiple to natural resources overall (they're the lifeblood of Canada's economy), and has a useful non-correlation to the S&P 500.

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In fact, I like it enough to add it toETF Advisor'sGlobal Growth and Long/Short portfolios. I also think that Europe's economy remains in the cross hairs of our weakening one, making shorting Europe one possible move on the board. However, since I think we're going to get a dead cat bounce in here, I'd be wary of overstepping our current short-selling bounds in the international and emerging equity markets. But I will hedge that wariness by taking an ultra-short position in the euro in our Long/Short portfolio.

With a current position in a currency ETF, and with two more being added to our portfolios' mix, I thought now would be a great time to provide snapshots for each of the currency ETFs we track. It's also a good time to discuss the risks and rewards of investing in currency markets, as well as one strategy that has been a mainstay of hedge funds for decades, which is, I want to emphasize, not the same thing as saying it's has been a profitable strategy.

First, currency trading is both as basic and as potentially volatile as investing gets. Basic, in that high-interest rate currencies have a tendency to strengthen relative to low-interest rate currencies, and vice versa. Volatile, in that that basic metric can change overnight, intra-day, on a whim, without warning.

For the first half of last year, we made hay using a basket approach to currencies rather than betting on a single one. The PowerShares Currency Harvest (nyse: DBV) let us not only buffer the blows of the stock market well but also helped us keep pace with the rapidly changing and economic landscapes here and abroad. As that landscape went from bad to worse, we sought the safe haven of the almighty dollar. It worked