What is a currency fund?
A currency fund is a mutual fund consisting of foreign currencies and securities denominated in foreign currencies. The fund can hold actual money but more likely will invest in money market instruments and futures contracts.
Why you should avoid currency funds
They are not an investment
Currency is not an investment. Like the dollar, the money of foreign countries is a medium of exchange to facilitate transactions, a unit of measure through which we ascribe value, and a store of wealth which can be accumulated. There is no reason to expect any growth or earnings. Since cash equivalent securities are often held, a small return akin to money market rates may be achieved. But after expenses are accounted for, currency funds are quite likely to provide negative returns.
They are a gamble
Exchange rates vary over time for a variety of economic and political reasons. There are many thousands of currency traders, some who do it for speculation, others as a course of business related to international trade and finance. The massive buying and selling of these participants results in the exchange rates we see posted online and in the papers. All the information known at any given time is reflected in these rates. If you think you know more than these participants, think again. At best you are looking at a coin toss. You bet heads. Expect tails. As you can see in Figure 22-1, during the decade ending 2017 the average return of all professionally managed currency funds was negative.
What you should do instead
If your interest in currency funds is based purely on the notion of appreciation, devote those dollars to the equity markets. Even if the dollar declines in value relative to other currencies, as long as you spend the bulk of your money in the U.S. you are no worse off. Moreover, a declining dollar makes American goods seem cheaper abroad. Expanding sales of U.S. made merchandise is good for U.S. stock prices.
If your interest in currency funds is based on a favorable impression of certain foreign economies, invest in the stocks of foreign companies instead. Profit seeking enterprises operating abroad should serve your needs better than a pile of stagnant cash. Seek no-load index mutual funds and low-cost exchange traded funds focused in the desired country or region.
* Data sources: The Vanguard Group, Inc., Morningstar, Inc.