A Simple Fund for the Euro

PowerShares CurrencyShares Euro Trust (FXE) is an exchange-traded fund (ETF) that allows investors to invest easily in the euro as a currency.

This fund can be a useful tool for would-be currency speculators who expect the euro to rise. Interestingly, the fund recently moved from Guggenheim to Invesco, which now manages it as part of its CurrencyShares fund line.

The mechanism by which this fund operates is simple. The fund is fully invested in cash in euro form. Owning shares in this fund as an investor is a lot like heading to a currency exchange and swapping some dollars for euros. But buying shares in the fund is more convenient and potentially has less of a fee attached.

Currently, 19 European countries use the euro as their joint currency. The value of the euro is influenced by European economies, as well as the policies of the European Central Bank (ECB) and individual European governments.

Because of the way it operates, FXE does an excellent job of tracking the euro/US dollar exchange rate. It is also extremely liquid and trades heavily each day with a tiny spread. Interested investors need to be aware that share sales of FXE are always taxed as ordinary income. Furthermore, FXE’s physical deposits of euros are uninsured, which means shareholders are exposed to the default risk of JPMorgan.

The value of the euro has climbed in the most recent 12 months, with investors in FXE achieving returns of 15.22%. Investors concerned about currency risk in the dollar may find this fund to be a valuable safe haven. The expense ratio for this fund is 0.40%, which is less than a physical exchange of currency typically would cost. Naturally, this currency fund does not pay dividends.

If market volatility concerns you, cash is a solid place to be, and investing in this fund is a different spin on keeping funds in cash that still allows for potential asset appreciation. If this fund’s focus on the euro sounds like a good idea to you, consider picking up shares in PowerShares CurrencyShares Euro Trust (FXE).

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.