Buying Euros as an Investment
The eurozone may have had its fair share of struggles over the years, but that's not stopping many investors who want to bet on the monetary union's long-term potential. 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.
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 who owns a lot of U.S. stock may want to hedge their bets by selling dollars and buying euros. A speculative U.S. 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 over time. Notably, ETNs are non-interest-paying debt instruments that often track the euro more accurately than ETFs.
The most popular euro ETFs and ETNs are as follows:
- UltraShort Euro Proshares (EUO)
- Short Euro Proshares (EUFX)
- Ultra Euro ProShares (ULE)
- Invesco CurrencyShares Euro Trust (FXE)
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. For example, the ULE ETF charges a 0.95 percent expense ratio that's significantly higher than many conventional equity ETFs. These fees can be particularly impactful over the long term if the ETFs are used as a hedge.
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 a deposit 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:
In general, the forex market is better suited for speculation than long-term hedging since the high amount of leverage translates to greater volatility. A small relative fall in a currency's valuation versus another currency could lead to a margin call and a complete loss for the investor. Brokers in these markets are also unregulated in many cases, which makes conducting due diligence on a broker very important before participating in the market.
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.
The ProShares UltraShort Euro ETF (EUO) is the most popular fund for short-selling the euro, with a 0.95 percent expense ratio and about $52.9 million in assets under management as of December 31, 2020.
Risks to Keep in Mind
Keep a few key risks in mind before buying or selling euros, ranging from ETF/ETN expenses to leverage risks in the forex market:
- 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.
Investors should be cognizant of these risks or consult an investment professional before buying or selling these funds to avoid any unnecessary risk of loss.