But when the global economy starts to regain its footing, the "carry trade" is expected to move back into vogue as interest rates in various countries start to diverge from one another.
One way to play this is with the PowerShares DB G10 Currency Harvest Trust (DBV). The underlying index of the ETF typically bets against the three lowest-yielding G10 currencies while going long in the three highest-yielding G-10 currencies. Graham Day, the alternative asset product strategist at Invesco PowerShares, thinks the fund may be well-positioned for a return to more traditional global interest rate patterns.
"We believe, it's well-suited for wider differences across international rates," he says, adding the fund has historically exhibited relatively low correlation to stock and bond prices. Right now, the ETF has a long position in the Australian and New Zealand dollars along with the Norwegian krone, and it is short the Japanese yen, Swiss franc and U.S. dollar.
The Growth Differential
As noted earlier, currency movements tend to correlate with economic growth. And that brings the topic back to China, which continues to be the fastest-growing major economy in the world. That's why fund managers at the WisdomTree Dreyfus Emerging Currency Fund (CEW) have been loading up on Asian currencies along with the Brazilian real and the Australian dollar. "As China goes, these countries tend to go," says WisdomTree's Parker.
The fund has only been in existence for three years in an economic environment that did not likely help it's strategy. But buying the currencies of countries with the most robust growth prospects has been a successful strategy in recent decades. Assuming China--and its trading partners--sustain healthy levels of trade in the global economy, this fund could perform smartly in coming years.
Multinational corporations hedge their currency risk on a daily basis, and everyday investors can hedge their own global portfolio holdings and mitigate currency risk through the judicious use of various ETF options.
David Sterman has worked as an investment analyst for nearly two decades. He was a senior analyst covering European banks at Smith Barney and was research director for Jesup & Lamont Securities. He also served as managing editor at TheStreet.com and research director at Individual Investor magazine.