More Currency Investment Possibilities...

....with a twist!

I have to admit. Currency investments are interesting to me. Hey, maybe you think international investments are where it's at. Maybe you think the U.S. dollar will be/is in a long term decline. Maybe you think the European Union will get it's act together. Maybe you think China is the future, or that China will dump a significant portion of the dollars they hold.

CurrencyShares from Rydex are pretty straightforward ETFs. If you buy the ETF, you're buying the currenty. A purchase of the ETF creates an obligation for Rydex to hold euros/yen/British pounds.

The new investment vehicles from iPath (Barclay's) are ETNs. Did you catch that "N"? I hope so, 'cause it means these are different. They're not ETFs. It's tricky. You aren't buying currency. You're buying a debt obligation from Barclay's. That's right - youre essentially buying something like a bond. You're buying a promise from Barclay's to pay you when you sell the ETN. Barclays could default......

The currentcy ETFs/ETNs all have a 0.4% expense ratio.

The interest rates are competitive with each other:

ERO (iPath Euro vs. USD): 3.55%
FXY (CurrencyShares Euro Trust): 3.54%
GBB (iPath British pound vs. USD): 5.05%
FXB (CurrencyShares British pound sterling trust): 4.90%
JYN (Japanese yen vs. USD): 0.25%
FXY (CurrencyShares Japanese yen trust): 0.24%

Interest income is taxed as interest. CurrencyShares pays it monthly. Barclays prices it into the price of the ETN - which could reduce taxes on your investment.

Capital appreciation for currency investments is subject to ordinary income taxes. Except oh wait! Barclays believes that, based on previous ETN experience, their ETNs are pre-paid contracts. What does this mean? You only pay taxes on appreciation when you sell the ETN. And, when you do, you pay only capital gains taxes, which are much lower.

There are steps you have to take. What does that mean? I'm not sure. It's somewhere in this 186 page prospectus. Ok, ok, I found the section. It actually provides a couple of forms. You fill one out and keep it in your records. You fill the other out and file it with your tax forms.

This just goes to show you. Do your homework. You never know what weirdness you'll find.

International Diversification

I've been reading a lot about diversification lately and its effect on performance and risk. More articles to come, but the bottom line is that diversification is good for your portfolio.

What this means, however, is that you need to diversify your international investment and not just your domestic investment. To this point, my international investment has consisted of 2 large indexes: Vanguard's Total International Stock Index and EFA, an ETF that tracks the MCSI Europe, Australia, and Far East (developed markets) index.

So how do you diversify your international investment? I'm not in the mood for managed mutual funds, and I certainly don't want to pick individual stocks (the individual stocks I still hold, like Johnson and Johnson and Coca Cola, do make significant portions of their revenue and profit abroad). Vanguard only has broad based international funds: VGTSX and the Vanguard International Value fund (useful for diversification into value stocks).

Options are finally starting to arrive. Here are a few:

EFV (EFA value index, subset of EFA): 0.4% expense ratio. $1b in assets. P/E ratio of about 15.65. Top 3 sectors: 41.98% financials, 10.43% consumer discretionary, 10.23% energy. Top 3 countries: 23.39% Japan, 21.99% U.K., 9.1% France.

EFG (EFA growth index, subset of EFA): 0.4% expense ratio. $483b in assets. P/E ration of about 22.55. Top 3 sectors: 17.03% financials, 14.65% industrials, 13% consumer discretionary. Top 3 countries: 24.12% U.K., 21.19% Japan, 9.9% France .

DLS: Expense ratio of 0.58%. $464m in assets. Top 3 sectors: 27.95% industrials, 17.25% consumer cyclical (discretionary), 17.09% consumer non-cyclical (staples). Top 3 countries: 22.97% U.K., 19.31% Austrialia, 15.45% Japan.

GWX: Expense ration of 0.6%. P/E ratio of about 18. Stocks with < $2b market cap in any country but the U.S. Top 3 sectors: 25.45% industrials, 19.01% consumer discretionary, 18.18% financials. Top 3 countries: 25.59% Japan, 13.42% U.K., 10.76% Canada.

Here's an article on WHY you want international investments. I believe the dollar isn't going to be top dog in the world currency markets forever; that means U.S. economic and stock market growth will start to lag that of international markets that are growing faster.

Here's a Marketwatch article on the new small cap international ETFs.