I was flattered that Random Roger posted a commentary on my previous post which compared exchange-traded foreign currency products. Roger is a financial advisor who has great insight into the workings of the financial markets and he is willing to share his thinking with self-directed investors. Random Roger is one of the few blogs I read every day. I greatly respect and admire his work and I particularly value his views on diversification.
Roger disagrees with my conclusion that FXE is the best choice for a low-cost, exchange traded hedge against the U.S. Dollar.
He presents a chart which clearly shows that several of
the single-currency ETFs, notably FXM, have significantly outperformed FXE in the last four months.
Roger is certainly right about that! My point is that some of those ETFs, particularly FXM and FXS, are not very liquid and caution is advised. Unless you are a patient and skillful trader, you will get burned by the bid-ask spread on entry, and again on exit. This will add to the cost of your position. If the trade goes against you, it could be difficult to get out at a fair price.
I think that someone who is interested in those particular currencies might be better off investing in single-country funds, individual stocks associated with the currency, FX, or even currency futures. But these choices do have more risk and progressively higher risk than holding one of the exchange-traded currency ETFs.
For a low-cost, exchange-traded, low-risk generic hedge against the dollar, I still maintain that FXE is the best choice at this time.