Most investors tend to shy away from trading currencies because they don’t understand how to buy and trade them.

There’s nothing wrong with that reasoning, as the most important rule of investing is to only invest in what you understand.

But at the same time, when you hear about the surging U.S. dollar, you can’t help but wonder if there’s a way to profit that doesn’t require anything more complicated than your current brokerage account.

Fortunately, there are currency ETFs that can be bought and sold just like stocks.

You don’t have to open a new account. You don’t have to worry about a lack of transparency or security with your trades.

And you can still make money.

Today, we’ll show you how currency ETFs can fit into any portfolio.

How To Use Currency ETFs
Currency ETFs can be used in two ways: for speculation (profiting off a currency’s price action) or for hedging (reducing risk linked to a currency’s price action).

For speculation, if you expect the U.S. dollar to continue to strengthen, you could buy shares of the Invesco DB US Dollar Index Bullish Fund (UUP), which tracks the movement of the U.S. dollar relative to other major currencies.

Since the start of the year, UUP has gone up nearly 18%. Plus, it’s in our Green Zone and in an uptrend, meaning it’s in a healthy state and on a bullish path.

But that bullish path for the dollar can end up being bearish for many stocks, particularly those with international operations.

The stronger the U.S. dollar, the more expensive it is for folks overseas to buy U.S. products. That can pinch demand, which then can cause profits, and the stock price, to drop. Take Walmart Inc. (WMT), for example. The company said that in the second quarter, international sales were negatively impacted by $1 billion from currency fluctuations.

If you bought WMT shares at the beginning of the year, you’d be down 3% by now — not as bad as the roughly 25% drop of the S&P 500, but still not ideal.

But with a currency hedge, you could have avoided this loss. The 18% gain of UUP would have been enough to pull your portfolio out of the negative numbers and into the profit zone.

The gains from a currency hedge might not perfectly offset the losses of every retail stock or every company whose sales have suffered from a stronger U.S. dollar, but they can help make those losses a little less painful.

While the world of trading currencies is complex, we hope this at least provides a starting point for understanding it and finding new investment opportunities within it.

— Keith Kaplan

Source: TradeSmith