An ETF, short for an exchange traded fund, is an investment vehicle that represents a basket of securities that tracks a particular index. They have grown in number and popularity. The short-dollar ETFs have earned a lot of money for smart investors during the dollar's decline.

Significance

Power Shares offers an ETF that tracks the falling dollar. Its symbol is UDN. The average number of shares traded daily is 405,309.

Function

The UDN aims to track the price and yield performance (before fees and expenses) of the Deutsche Bank Short U.S. Dollar Futures index, an index of short futures contracts. The futures contract seeks to mirror the performance of being short against the following currencies: the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

Considerations

Typically, when the dollar is falling; when oil, gold and other metals are rising; and when interest rates are low, the UDN rises.

Features

Higher interest rates offered outside the U.S. have a negative effect on the U.S. dollar. Investors, savers and those seeking higher yields will pull money out of dollar-weighted investments such as U.S. Treasuries and put their money in foreign instruments offering more attractive yields. This scenario is also bullish for short-dollar ETFs such as UDN.

Performance

The UDN returned 4.15 percent in 2009. There are also options on the ETF allowing a trader to buy or sell puts and calls.

Potential

When investor and consumer confidence is low, the housing market is weak, interest rates are falling and commodity prices are climbing, the short-dollar ETF benefits. The UDN fits into a bear market category, but it can be quite bullish during trying times.

Source:

Yahoo Finance

The Guide to ETF Investing: Inverse Dollar ETFs Continue to Rally