In the past few years currency trading (investing in money) has become really popular. This popularity comes from the development of technologies that have made it easier for new retail brokers to launch and advertise to potential customers. The internet is filled with adverts and links from various brokers such as Plus500, eToro and IQ Options. However the popularity of currency trading also comes from the dark side aka forex scams. During 2014, 2015, 2016 and 2017 South Africa had plenty of various forex scams and "teachers" who promoted forex trading in a get-rich-quick fashion. Forex has since become a dirty word that people are weary of hence I use the term currency investing. However it does not have to be bad. There is an easier and safer way to invest in currencies and commodities without losing control of the investment or falling prey to evil brokers. Today I am going to show you how to invest in currencies without using a CFD account that requires you to use leverage (margin account). Lets go...
Introducing ETNs
Exchange Traded Notes are unsecured debt instruments that pay a return linked to the performance of an index, a currency or a commodity. In a similar arrangement to investing in bonds, ETN payments rely on the full credit and faith of the institution backing the product.
Lets break that down,
How do ETNs work?
Investors purchase ETN's from an issuer or through their retail brokerage account. The issuer than pays to the investor a return upon the sale of the ETN based how the underlying asset performed (minus fees and spread, if there are any). Note that ETN's do not actually own the underlying assets but rather "promise" to pay you money based on the underlying assets performances. Hence the credit worthiness of the issuer is very important.
An example of this is: You buy an ETN for gold. This ETN tracks the price of gold. Say the gold price is R1000 and the price moves up by 10% to R1100 and then you sell the ETN.
The issuer would then pay you 10% plus principle as if you were actually selling real gold worth R1100 and because you bought it for R1000 you would realize the profit of R100 which is 10% in our example. The same is true if the price drops by 10% and you decide to sell, you would sell at the new price of R900 and lose R100 which is 10% but of-course you could wait for the price to go back up again before you sell. This is of-course is where skills in analytics are needed so you can determine for yourself when to sell or buy more or hold.
But Omega, how does currency trading with no leverage fit in?
Well ETN's do not require you to open a margin account with a broker and thus trade a leveraged CFD like you would with a traditional retail brokerage account. Instead you can buy an ETN at 1:1 for value. Meaning if $1 cost R14.50 you would pay R14:50 for 1 ETN representing $1. This isn't ideal if you are the type that wants to use leverage to increase your gains and don't mind taking on the risk. Thus ETN's are more for investors who are looking at investing in a currency or commodity long-term and wish to hold that particular currency without having to buy it literally and keep it in a global account or something similar to it.
So the benefits of ETN's is that they are an easy way to get exposure to a foreign currency or whatever that particular ETN is tracking, hedge against rand depreciation using an opposing currency ETN and keep a foreign currency and be able to exchange the gains to the local currency without any fees. Personally for me the biggest benefit is being able to take advantage of monthly rand depreciation against the dollar. Buy $1 USD ETN on the first and watch the dollar appreciate against the rand the whole month and then sell my ETN and pocket the difference and reinvest my principle back in the ETN or else where. The best part is having not to worry about leverage. If the dollar was to lose value totally it would theoretically only decrease to a maximum of 1 cent against the rand but I would still own that dollar and not have my asset liquidated from a margin call.
What are the risks with ETN's?
Your biggest risk when investing in an ETN is having the counter party default and go belly up. Most ETN's come from credit worthy institutions but big institutions have collapsed before so an AAA credit rating is not full proof tho it makes it unlikely that you would not see the institution slowly disintegrate. Thus when buying an ETN its key to check the credit rating of the institution you're buying it from. You can check here or here or here.
The second risk you face is liquidity. ETNs are not the most popular product on an exchange so the pool of buyers and sellers can be limited which makes ETNs not very liquid. This can stop you from selling at the desired price which will affect the amount of profit you earn from the investment. This means the spread can eat away at your gains which is not ideal. A strategy I employ to decrease the affects of lack of liquidity is to hold the ETN longer than a month, this ensures that if the price moves favorable to my desired scenario it climbs high enough that the spread has minimum effect on my gain, thus the longer you hold the ETN or the more the price moves further away from your initial purchase price the better your returns will be.
So how can you get ETNs?
My favorite way to access ETNs is using your retail stock brokerage account. They are probably listed in the various assets that the broker offers to you to invest in. If your brokerage account does not have them or you do not have one, I personally recommend using EASY EQUITIES, just click here to get started. (NOTE: This is NOT an affiliate link and I have no association whatsoever to Easy Equities, I am just a happy customer.. but I do have Purple Group shares in my portfolio which is the parent company of Easy Equities)
Here is a list of some of my favorite ETNs:
New Wave USD ETN ... I use this ETN to hold dollars long-term. Read about it here.
New Wave EUR ETN ... I obviously use this one to hold euros long-term, however it is currently not in my portfolio at the time of writing, you can read about it here.
Here are some other ETN's available on the JSE on the Easy Equities platform:
Happy Investing
-Omega
Remember: Opinions expressed in this article do not and never will constitute financial advice. Every persons financial situation is different, I recommend you speak to a financial adviser about yours.
Good article but must admit, still goes over my head a bit. Just check your links, none of the links after "Here is a list of some of my favorite ETNs" actually go to a page, unless its not allowing me, but the previous links went through fine