26 Forex Plays You Can Trade In Your Online Stock Account. By The World Currency Watch Research Team

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1 26 Forex Plays You Can Trade In Your Online Stock Account By The World Currency Watch Research Team

2 World Currency Watch 98 S.E. 6th Avenue, Suite 2 Delray Beach, FL USA USA Toll-Free Tel: info@worldcurrencywatch.com Website: Copyright 2009 by World Currency Watch. All international and domestic rights reserved. No part of this publication may be reproduced in any form, printed or electronic, without prior written permission from the publisher, World Currency Watch. Notice: This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold and distributed with the understanding that the authors, publisher and sellers are not engaged in rendering legal, accounting or other professional advice or services. If legal or other expert assistance is required, the services of a competent professional advisor should be sought. The information and recommendations contained in this brochure have been compiled from sources considered reliable. Employees, officers and directors of World Currency Watch do not receive fees or commissions for any recommendations of services or products in this brochure. Investment and other recommendations carry inherent risks. As no investment recommendation can be guaranteed, World Currency Watch takes no responsibility for any loss or inconvenience if one chooses to accept them. Any information or statements contained in this publication are not to be considered by the reader as personalized investment advice. The authors and any agents of World Currency Watch are not licensed under U.S. or other securities laws to address particular investment situations and nothing herein should be deemed as personalized investment advice.

3 26 Forex Plays You Can Trade In Your Online Stock Account 26 Currency ETFs You Can Buy with a Click of Your Mouse Admit it. When you hear the words Forex trader, you don t picture yourself lounging in your home office, casually buying the euro or yen with a click of your mouse. No, instead, you picture a sleep-deprived, family-dodging, adrenalin addicted, trade-aholic glued to his computer screen constantly firing off bid and ask prices for random currencies you ve never heard of at 4:00 A.M. And trust us, those Forex trading junkies do exist. But what if you want to trade currencies and you re not interested in day trading? Fortunately, there is a way you can participate in the largest, most liquid market on earth and still sleep like baby at night and even spend quality time with your family. In fact, you can even buy and sell foreign currencies without a special Forex trading account and without any special training on a new trading platforms. You can even buy these in your IRA or other qualified retirement account. In a regular (non-retirement) stock brokerage account, you can also trade many currencies with various strategies and levels of risk. For instance, you can trade currencies using no leverage (borrowed money) at all. Or, even if you don t have a margin account, there are currency investments that will give you a little leverage (allowing you to control twice as much currency as you put up in cash). Finally, if you do have a bit of trader s blood in you, you can also trade these currencies with high leverage, in the form of options on currencies that trade right from your own stock market account. These opportunities all begin with the introduction of one of the most innovative, cost-effective and possibility enhancing investment vehicles to come along in the last hundred years: the Exchange Traded Fund, or ETF. The Perfect Vehicle for the Non-Forex Trader ETF s trade like closed-end funds on a stock exchange with some key exceptions. They usually are not managed. They simply follow a pre-determined index or the market price of a commodity such as the value of a foreign currency. Hence, they tend to have miniscule expense ratios. In the case of currency ETF s, these often range below 0.40% (four-tenths of one percent), 3

4 comparing favorably to average expense ratios of about 1.5% for most managed domestic mutual funds. Also, ETF s tend to be very liquid and trade with tight spreads. And since they operate like funds at the institutional level (for instance, redeemable for shareholders with 50,000 shares or more), they tend not to trade at large premiums or discounts to their net asset value (NAV). They re transparent, easy to buy and sell and offer a great way to diversify out of a traditional portfolio of mostly stocks and a few bonds. In short, as a non-forex investor, you can purchase foreign currencies the exact same way you would buy a few shares of IBM or Coca-Cola on the NYSE. All you need is an online stock brokerage account (or if you prefer, a full-service stock broker who you can call with your request), and an introduction to currency ETFs The Currency Revolution Begins The fact is, exchange traded funds (ETFs) are nothing new in the investment world. However, new ETF s are being introduced every single month. And with many of the newcomers, you gain new opportunities to invest in commodities and currencies that previously were much harder to access. The first exchange traded fund debuted on the Toronto exchange 20 years ago (and the first U.S. ETF hit the markets back in 1993). Since then, ETFs have exploded into the global markets. Currently there are over 900 ETFs listed worldwide. As of December 2008, the combined value of ETF assets just in the United States was $ billion. Worldwide, ETF assets currently stand at $628 billion. And the ETF market continues to surge. With ETFs offered in nearly every asset class from financials to commodities, it s estimated that global ETF assets will climb above $1.9 Trillion by And yet, with all this buzz about ETFs, currency ETFs are still fairly new. The oldest currency ETF has only been available since December Most currency ETFs didn t even launch until mid-2006 or And of course, new currency ETFs are still being introduced. To this day, many investors still don t even know they exist. They have no idea that they could easily buy and short currencies with just a click of their mouse, as easily as you would buy any stock. No option or Forex trading account required. That s a shame, considering the dynamite profits that just a handful of the right currency ETFs could have earned you over the last few years +25% if you bought and held the Euro Currency Trust (NYSE: FXE) for under two years (11/20/06 4/22/08) +29% if you sold short the British pound Currency Trust (NYSE: FXB) for a year (11/6/07 11/14/08) +11% for buying and holding the WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF) for six months (5/23/08 10/27/08) 4

5 +24% for buying and holding the Australian dollar Currency Trust (NYSE: FXA) for two and a half years (12/5/06 7/22/08) +36% if you sold short the WisdomTree Dreyfus South African Rand Fund (NYSE: SZR) for under three months (8/4/08-10/22/08) A Look Inside a Currency ETF Strictly speaking, most currency ETFs are actually investment trusts that hold physical currency in trust for all the fund s investors. Similar to an index ETF, such currency ETFs are designed to track the underlying currency in dollar terms. So for example, say you were bullish on the Japanese yen, so you bought a Japanese yen ETF. If the price of the Japanese yen rose, say, 10% versus the dollar, then your Japanese yen ETF would also rise about 10% in value. Investors like currency ETFs because they are extremely liquid. Unlike mutual funds that only allow you to sell on certain days, you can buy and sell exchange traded funds anytime during all normal trading hours on the New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSX). A few currency ETFs are even available on the London (LSE) or Frankfurt Exchanges. Such currency ETFs are extremely flexible and you can use them to play out several different investment strategies. You can use them to ride a short-term trend over just a few weeks, or even a long-term trend over a few years. In addition to flexibility and liquidity, currency ETFs can also offer you the chance to Buy and sell-short in your standard stock brokerage account Invest with no minimum investment Use margin and enhance your leverage Closely track the price of the underlying currency Hold your currency ETF as long as you like with no time premium or expiration Also, currency ETFs (and indeed, all currencies) are NOT tied to any particular stock market. This means currency ETFs have the potential to rise even when the rest of the markets are crashing. Case in point: In 2008, one of the worst years for stocks in decades, both the U.S. dollar and Japanese yen continued to rally as stocks crumbled. Any investor holding ETFs in either of these currency ETFs was rewarded. But if you re a U.S.-based investor, you may ask, How can you hold a dollar ETF? The answer is through an ETF that weights dollars against a basket of currencies. Or by shorting a particular foreign currency ETF. So, for example, if you short the British Pound ETF (FXB), in effect, you are going long the dollar versus the pound. 5

6 Your One-Stop Currency ETF Shopping List The first currency ETF s to come along were the majors. These are the currencies of the largest economies in the world. Together, these currencies (not the ETF s themselves per se) make up well over 80% of global currency-trading volume. The majors consist of: The U.S. Dollar (of course!) PowerShares DB US Dollar Index Bullish This Dollar Bull ETF shot up while stock markets plummeted in the fall of July 2008 August September October November December The Japanese Yen CurrencyShares Japanese Yen Trust 115 Investors fled to the safe haven Japanese yen as stocks fell in Sept 2008 October November December Jan 2009 The Euro CurrencyShares Euro Trust The euro steadily climbed for three years against the dollar, before finally reaching a high of 1.59 in July

7 The British Pound CurrencyShares British Pound Sterling Trust The British pound has spiraled lower as the credit crunch erupted in the U.K The Swiss Franc CurrencyShares Swiss Franc Trust Great example of a short-term trend: This Swiss franc ETF leapt over 13% in under a month December The Canadian Dollar CurrencyShares Canadian dollar Trust The Canadian dollar closely tracks the price of oil, so this Canadian ETF dropped in price as oil prices corrected in July 2008 August Sept Oct Nov 7

8 The Australian Dollar CurrencyShares Australian Dollar Trust The Aussie dollar steadily rose from 2006 to mid-2008, as commodities continued to climb in price Over the last few years, several companies have become even more creative with their currency ETF offerings. Now you can buy currency basket ETFs which give you exposure to several different currencies at once. You can buy currencies from the emerging markets like India, China, Mexico, and Brazil. You can purchase inverse currency ETFs that rise in price as their underlying currency drops in price, so you can easily short a currency without worrying about setting up a margin account. And, as stated before, you can even purchase currency ETFs with built-in leverage that offer leverage so you can earn twice the returns if the underlying currency rises (or falls, depending on the specific ETF). To help you choose, we have compiled a list of all the currency ETFs we have found in both the U.S. and Canada MAJOR CURRENCY ETFs: Bullish ETFs on currencies 1. PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) PowerShares DB US Dollar Index Bullish July 2008 August September October November December This ETF tracks the price and yield performance, of the Deutsche Bank Long U.S. Dollar Futures index. It s designed to replicate the performance of being long the U.S. Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. 8

9 2. Horizons BetaPro U.S. Dollar Bull Plus ETF (TSX: HDU) 3. WisdomTree Dreyfus Euro Fund (NYSE: EU) 4. CurrencyShares Euro Trust (NYSE: FXE) 5. CurrencyShares British pound Currency Trust (NYSE: FXB) 6. CurrencyShares Swiss franc Currency Trust (NYSE: FXF) 7. CurrencyShares Japanese yen Currency Trust (NYSE: FXY) 8. WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF) 9. CurrencyShares Australian dollar Currency Trust (NYSE: FXA) 10. CurrencyShares Canadian dollar Currency Trust (NYSE: FXC) 11. WisdomTree Dreyfus New Zealand Dollar Fund (NYSE: BNZ) INVERSE ETFs: Bearish ETFs on currencies 12. ProShares UltraShort Euro ETF (NYSE: EUO) (also see leveraged ETFs below for more) This ETF allows you to short the euro with two times leverage, so if the euro should fall 10%, you make 20% (and vice versa should the euro rise 10%, you lose 20%). 13. ProShares UltraShort Yen ETF (NYSE: YCS) (also see leveraged ETFs below for more) This ETF allows you to short the yen with two times leverage, so if the euro should fall 10%, you make 20% (and vice versa should the yen rise 10%, you lose 20%). 14. PowerShares DB US Dollar Index Bearish Fund (NYSE: UDN) This ETF is designed to help you short the U.S. dollar. 15. Horizons BetaPro U.S. Dollar Bear Plus ETF (TSX: HDD) This ETF also allows you to short the U.S. dollar. LEVERAGED ETFs: ETFs with greater profit potential 16. ProShares Ultra Yen ETF (NYSE: YCL) This ETF allows you to buy the yen with two times leverage, so if the yen should rise10%, you make 20% (and vice versa should the yen fall 10% in price, you lose 20%). 17. ProShares Ultra Euro ETF (NYSE: ULE) This ETF allows you to buy the euro with two times leverage, so if the euro should rise10%, you make 20% (and vice versa should the euro fall 10% in price, you lose 20%). ProShares UltraShort Euro ETF (NYSE: EUO) (also see inverse ETFs above for more details) This inverse ETF lets you short the euro with leveraged returns, hence the ultra in the name. ProShares UltraShort Yen ETF (NYSE: YCS) (also see inverse ETFs above for more details) This inverse ETF lets you short the yen with leveraged returns, hence the ultra in the name. 9

10 EXOTICS: Bullish ETFs on emerging market currencies 18. CurrencyShares Mexican peso Currency Trust (NYSE: FXM) CurrencyShares Mexican Peso Trust Great opportunity to short the peso! This Mexican peso ETF fell over 30% in just six months Sep 2008 Oct Nov Dec Jan 2009 Feb 19. WisdomTree Dreyfus Brazilian Real Fund (NYSE: BZF) Wisdom Tree Dreyfus ETF BZ Real Fund The Brazilian real ETF tanks as commodity markets sink around the world Sep 2008 October November 20. WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB) Wisdom Tree Dreyfus Chinese Yuan Fund Chinese yuan ETF slowly rises in Q as the Chinese government gradually eases the peg Jan 16, 2009 Jan 30 Feb 6 Feb 13 Feb 20 10

11 21. WisdomTree Dreyfus Indian Rupee Fund (NYSE: ICN) Wisdom Tree Dreyfus Indian Rupee Fund ETF Emerging markets like India were hit the hardest when global stock markets plummeted in October WisdomTree Dreyfus South African Rand Fund (NYSE: SZR) Wisdom Tree Dreyfus South African Rand Fund Traders grabbed their money and ran from speculative markets like South Africa when stock markets fell July 2008 August September October CurrencyShares Swedish krona Currency Trust (NYSE: FXS) CurrencyShares Swedish Krona Trust Another shorting opportunity: The Swedish krona ETF fell over 28% in six months as the credit crunch ripped through global markets Sep 2008 Oct Nov Dec Jan 2009 Feb 11

12 24. CurrencyShares Russian Ruble Currency Trust (NYSE: XRU) CurrencyShares Russian Ruble Trust The Russian ruble has suffered from the banking crisis in Russia Nov 2008 Dec Jan 2009 Feb OTHER 25. WisdomTree U.S. Current Income Fund (USY) 26. PowerShares DB G10 Currency Fund (NYSE: DBV) How to Buy or Short ETFs The easiest way to purchase any exchange-traded fund is through an online broker or through a regular full-service broker. If you re bullish on a particular currency, you simply buy an ETF that tracks that underlying currency. If you re bearish on a particular currency, the easiest way to short a currency ETF is to buy an inverse ETF. Otherwise, you ll need a margin account to short that particular ETF, just as you would if you were to short a regular stock. As we mentioned, you can also purchase most currency ETFs through an IRA or qualified retirement account, but please be aware that you can NOT short any ETFs with your standard retirement account. However, ask your broker about buying inverse ETFs because some will allow you to buy these shorting vehicles as long as they re listed on the exchange. Some brokers also allow you to use leveraged ETFs (like the Ultra s, at 2-to-1 leverage in the list above) with a retirement plan. However, if you re unable to buy leveraged ETFs in a retirement account, you should be able to buy leveraged ETF s with any standard brokerage account. But before you buy any ETFs for either your retirement, joint or other stock brokerage account, be sure to read the ETF s prospectus to find out about taxable income, any fees, dividends etc. To learn more about any of these ETFs above, you can visit the ETF providers individual websites at:

13 For more on trading currency ETFs, you can check out our monthly newsletter, the Currency Capitalist. Each month, Chuck Butler, a 20-year veteran in the currency markets, tells you how to buy and sell ETFs and other long-term currency plays, so you can build a diversified portfolio far outside the volatility of the stock and commodity markets. Learn More About Currency Trading Now! Note: As we went to press with this report, we heard rumors that a particular ETF provider would like to introduce, not one, but 25 new currency ETFs, in a wide variety of countries. We ll keep you updated on any developments on this story in our daily newsletter, FX University Daily and our monthly newsletter, Currency Capitalist. 13