A very interesting thing about the current financial crisis is the rise of the US Dollar. Its interesting because when economies collapse in other countries – the national currency also crashes. However, as the US economy heads for a deep recession, the dollar gains in strength every day.
The dollar has gained against all major currencies (except the yen), and especially against the Australian Dollar. To put things in perspective, when compared with other currencies, the Australian Dollar did gain significantly more against the US dollar, in the past year or so.
Australia is a resource rich country and exports a lot of its minerals to countries like – China, which will spend a lot on expanding its local infrastructure in the next few years.
The fact that a substantial part of China’s stimulus package is devoted to building infrastructure is good news for Australia. The other positive thing about Australia is that it is one of the few developed countries that have been impacted very little by the global crisis.
How to invest in the Australian Dollar?
For an ordinary investor, the easiest way is – buying an Exchange Traded Fund that tracks the price of the Australian dollar against the US dollar.
Currency Shares Australian Dollar ETF (FXA) does exactly this. Here is a chart of how it moved over the last couple of years.
Here is a list of some other currency ETFs that you may be interested in.
You can invest directly in Forex too, but, that may not be a good option for regular investors as the leverage in Forex is much higher than equities and you may stand to lose a lot of money.
Note: I am not a financial advisor and this should not be treated as a buy recommendation on the ETF.
The Big Difference
The main difference between an Exchange Traded Fund (ETF) and an Index fund is that an ETF can be traded on a stock exchange like a stock. You can buy or sell it at your will, and even short it.
As opposed to this, an Index fund cannot be bought from a stock exchange and has to be directly purchased from the mutual fund sponsor. You will not be able to trade it as freely as an ETF.
Apart from this one difference listed above, there are no concrete differences between an Index Fund and an ETF tracking the same index as far as the retail investor is concerned.
An ETF may have lower costs (like no entry or exit loads) than an index fund, but you pay a bid-ask spread every time you buy an ETF which is non-existent in an Index fund. So, it can’t be said that one is cheaper than the other.
As far as comparison in returns is concerned, it is not a fair comparison to match one against the other so you can’t really say which one is better.
Warren Buffet’s view
According to this news article Warren Buffet tends to favor low cost Index Funds over ETFs. His rationale is very interesting. He says that ETFs present a temptation for retail investors to buy and sell very frequently and incur trading costs.
Index funds have no such temptations and will turn out to be cheaper and more profitable in the long run. According to Buffet, “I have nothing against ETFs, but I really think an index fund that just charges a few basis points for management is pretty hard to beat. You put it away, you have nobody encouraging you to trade it next week or next month … your broker isn’t going to be on you.”
If you were thinking of buying an ETF or an Index fund, then in all probability, you do have a sector that you want to buy in or you may just want to but the S&P 500. In such a scenario, it is best to look at various schemes and find out the one with the lowest cost.