Tuesday, February 15, 2011

How Forex Affects an ETF for Global Investment

 Showcase of Australia and Korea 

In a global marketplace, the return on investment for an exchange traded fund (ETF) depends in part on the behavior of the foreign exchange (forex) market. Whatever the type of asset, the turnout of the currency in a particular country can have a big impact on the payoff for an international investor. It makes no difference whether the investment involves a financial instrument like a stock or bond, or a tangible object such as land or housing.

Many people have the impression that equities and currencies are independent classes of assets. While that may be true in principle, it’s hardly the case in practice.

For this reason, the global investor has to consider the linkages amongst different types of assets. The forces at work are examined in connection with a couple of stark examples involving Australia and Korea. The case studies happen to involve divergent cultures and distinct time scales, but the crucial patterns crop up regardless.

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