How to Buy Euros as an Investment

Buying Euros Directly and with ETFs

Getty Images / Jonathan McHugh.

The eurozone may have a checkered past and an uncertain future, but that's not stopping many investors that want to bet on the monetary union's turnaround. One of the most direct ways to invest in the eurozone is through the purchase of euros - the area's common currency. Successful economies tend to raise interest rates in order to keep inflation in check, which increases demand for its currency and thereby increases its price relative to other currencies.

In this article, we'll take a look at the benefits, risks, and most effective ways to buy the euro as an investment in the eurozone's economic turnaround.

Why Invest in the Euro?

Currencies are not considered viable long-term investments, since they don't usually trend up over time, like equities or bonds. Rather, investors looking to diversify their portfolios abroad may want to look into foreign equities or bonds. These options offer significantly greater long-term upside potential given that they are backed by real businesses rather than just a means of transaction.

Investors may, however, be interested in purchasing currency in order to hedge out currency risk or place bets on a currency's rise or fall. For example, a European investor that owns a lot of U.S. stock may want to hedge his or her bets buying euros. Or, an investor confident in the euro's short-term recovery may want to capitalize on the upside by doing the same.

Buying Euros with ETFs

Exchange traded funds (ETFs) and exchange traded notes (ETNs) represent the easiest way for investors to buy exposure to euros without buying physical euros. These funds use foreign cash deposits or futures contracts to track the euro's movements. Unlike ETFs, ETNs are non-interest-paying debt instruments that track the euro much more accurately.

Here are the most popular euro ETFs and ETNs:

  • Market Vectors Double Long Euro ETN (URR)
  • Ultra Euro ProShares (ULE)
  • CurrencyShares Euro Trust (FXE)
  • WisdomTree Dreyfus Euro (EU)

Investors should keep in mind that these ETFs and ETNs charge expense ratios in exchange for managing the funds, which can eat into returns over time.

Investing in the Forex Market

The foreign exchange (forex) market offers a way for investors to purchase euros with leverage that's not available in standard foreign bank accounts. With deposits as low as $500, investors can purchase currencies with margin levels that range from 50:1 to more than 10,000:1. Of course, this greater leverage also translates to increased volatility and risk of loss.

Some popular forex brokers include:

Taking the Other Side of the Bet

Investors looking to place a bearish bet on the euro have several options, including buying euro short ETFs and short selling the euro directly in the foreign exchange market. Short selling can be useful in the same scenarios that buying euros may make sense - as a hedge or short-term trade - but entail many of the same risks as far as trading currencies is concerned.

ETFs used to short-sell the euro include:

  • ProShares UltraShort Euro ETF (EUO)

Risks to Keep in Mind

There are a few key risks to keep in mind before buying or selling euros, ranging from ETF/ETN expenses to leverage risks in the forex market.

Here are some of risks to consider:

  • Currency ETFs and ETNs tend to have lofty expense ratios and a high turnover rate.
  • ETFs and ETNs that use futures contracts may be subject to different tax rules.
  • Trading in the forex market involves significant leverage and can be very risky.
  • Currencies generally shouldn't be traded as long-term investments.
  • Volatility can arise from specific macroeconomic events that should be monitored.

Key Points to Remember

  • One of the most direct ways to invest in the eurozone is through the purchase of euros - the area's common currency.
  • Currencies don't make very good long-term investments, but buying euros can be useful when hedging bets or placing short-term trades.
  • Investors can buy euros easiest using exchange traded funds (ETFs) and exchange traded notes (ETNs), as well as more directly on the forex market.