Bullish on real estate? You can buy one of Rydex’s Real Estate Funds (RYREX). Bearish on the S&P? Then the Rydex Invesrse S&P Fund (RYURX) is the right investment for you.

In fact, you can even get hedge fund-type returns without ever owning a hedge fund. Just look at Rydex’s Absolute Return Strategies Fund (RYMQX). This alternative investment product seeks capital appreciation in line with hedge fund returns.

Whether it is commodities, currencies, futures or sector investing, there is a Rydex fund or ETF that you can buy to capitalize on these opportunities. And the best part is, there are long and short funds. Now, before I tell you what Rydex products I like, here is a look at some of the company’s best performing funds over the last year:

The top performers aren’t surprising — precious metals, Japanese stocks, energy services are all in a bull market this year. But even if you owned these funds or stocks, your portfolio might still be in danger.

The danger is currency risk. Let me explain…

Lets say you owned a Japanese stock and it went up 20%. If the Japanese yen fell 5% during that time period, you’ve just had 5% of your profits wiped out. Your real profit then, is 15%. That’s your currency risk. (If you bought domestic stocks, however, there is no currency risk because there is no exchange rate involved.)

So if you owned foreign stocks, they could be exposed to currency risk. That means you need to hedge this risk with currency trading. In the case of our example above, if you expected the yen to fall, you would hedge your exposure to the yen by selling yen against the dollar.

If you want to hedge currency exposure, or merely speculate on the ups and downs of the foreign exchange market, there are Rydex funds for this purpose. The firm recently revealed its brand new concept of “currency shares.”

Currency shares are exchange-traded funds that behave just like their underlying currency. You can speculate on the Australian dollar, British pound, Canadian dollar, Euro, Mexican peso, Swedish krona and Swiss franc using currency shares.

If I were to speculate currencies, I will go long on the commodity currencies — the Australian and Canadian dollars. Take a look at the Australian and Canadian currency shares performance:

Australian Dollar Currency Shares (FXA)

Canadian Dollar Currency Shares (FXC)

Both the Australian and Canadian dollars are commodity currencies. This means both countries largely depend on exports of commodities for their income. With the ongoing global commodities boom, export dollars are pouring into Australia and Canada. This means they have healthy foreign exchange reserves and a strengthening currency.

Before you speculate in the foreign currency market, here are a few factors that affect a country’s currency:

· National debt
· Interest rates and inflation
· Trade deficit (exports vs. imports)
· Currency pegs
· The forex market — who is buying and who is selling?
· Geopolitical environment

Despite the fact that several factors are at play in the foreign currency market, don’t forget that it is the largest and most liquid market in the world. And currency shares provide an easy way to gain exposure to this market.

Regards,

Sala
August 18, 2006

The Easiest Way to Speculate Currencies was originally featured in the Penny Sleuth.