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 their currency and thereby increases its price relative to other currencies.
- Investing in euros is one of the simplest ways of investing in the eurozone.
- There are a number of ways to invest in euros, including ETFs, ETNs, or directly through the forex market.
- Although currencies can be good investments, be aware of the risks and monitor markets closely.
Why Invest in the Euro?
Currencies are not considered viable long-term investments. This is because they don't usually trend up over time as equities or bonds do. But if you're looking to diversify your portfolio abroad, you may want to look into foreign equities or bonds. These options offer much greater long-term upside potential. 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 who is confident in the euro's short-term recovery may want to capitalize on the upside by doing the same.
Why Buy Euros With ETFs?
Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) represent the easiest ways to buy exposure to euros without buying actual 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; they 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)
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 instance, at the end of Q1 2021, the ULE ETF charged a 0.95% expense ratio. This is significantly higher than many conventional equity ETFs. These fees can be more 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 you can purchase euros with leverage that's not available in standard foreign bank accounts. With a deposit as low as $500, you can buy currencies with margin levels that range from 50 to 1 to more than 10,000 to 1. Of course, this greater leverage also translates to increased volatility and risk of loss.
Some popular forex brokers include:
In most cases, the forex market is better suited for speculation than long-term hedging. The high amount of leverage comes with greater volatility. A small relative fall in a currency's valuation vs. another currency could lead to a margin call and a complete loss. Brokers in these markets are also unregulated in many cases. This makes conducting due diligence on a broker very important before participating in the market.
Taking the Other Side of the Bet
If you are looking to place a bearish bet on the euro, you have several options. You could buy euro short ETFs and short sell the euro directly in the forex market. Short selling can be useful in the same scenarios in which buying euros may make sense—as a hedge or short-term trade. But it entails 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. It had a 0.95% expense ratio and about $54.9 million in assets under management as of March 31, 2021.
Risks to Keep in Mind
Keep a few key risks in mind before buying or selling euros; these risks range from ETF/ETN expenses to leverage risks in the forex market:
- Currency ETFs and ETNs tend to have lofty expense ratios and high turnover rates.
- ETFs and ETNs that use futures contracts may be subject to different tax rules.
- Trading in the forex market involves significant leverage; it 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.
You should be cognizant of these risks. Or, consult an investment professional before buying or selling these funds. This can help you avoid any unnecessary risk of loss.