Foreign Currency Certificates of Deposit (CDs)

If you are an investor who wants to diversify your investment portfolio outside the US dollar without using the foreign exchange market (forex), one way is to invest in foreign currency CDs. Another is through foreign stocks or Exchange Traded Funds. I currently have several foreign ETFs in my portfolio (for example VEU and VWO) as well as Canadian energy company stocks (such as AAV and PWE) which help to diversify my portfolio outside the US dollar. Foreign exchange rate changes can have a significant effect on foreign stock returns over short-term periods. A weaker dollar versus the foreign currency of the country that you are invested in will lead to higher returns for the US investor. Foreign stocks that grow in local currency are worth more when converted back into cheaper US dollars (a strengthening dollar will have the opposite effect – it will lead to lower returns).

With all the issues presently barraging the US dollar and economy – large government and trade deficits, the credit crunch, etc. – investing in foreign currency CDs may be a way for my investment portfolio to diversify and hedge against the US dollar. After googling “Investing in Foreign Currency CDs” I found that one US bank, EverBank, offers Federal Deposit Insurance Corporation (FDIC) insured foreign currency CDs. Please note that the FDIC insurance will cover loss because of bank failure but not currency fluctuation losses. Like any investment strategy there are risks and rewards.

So what are the advantages and disadvantages of investing in foreign currency CDs using EverBank?

Advantages:
• Diversify your investments outside the US dollar.
• You don’t need to open a bank account outside the US to invest in foreign currency CDs.
• FDIC insurance
• Multi-currency CDs. For example, the Commodity Basket CD includes the Australian dollar, Canada dollar, New Zealand dollar and South African rand. Using index currency CDs helps to diversify the currency risk versus the US dollar.
• If you allow your CD to renew, you will not be charged a currency conversion fee.
• Available in IRA accounts.
• Gives you access to emerging countries’ currencies, for example, Brazilian real, Indian rupee and South African rand.


Disadvantages:
• Currency conversion will be within 1% of the available market rate for the selected foreign currency.
• Risk of loss of principal due to changes in currency exchange rates. For example, if you invest in the Canadian dollar CD and Canada’s currency exchange rate decreases versus the US dollar, you would lose some of your principal investment when the CD reaches its maturity should you decide not to renew and it is converted to US dollars.
• Examples of EverBank’s 3 month CD interest rates (as of May 6, 2011) are the following: Brazilian real interest rate is 3%, Swiss franc interest rate is 0% and New World Energy CD (Australian dollar, Canada dollar and Norwegian krone) interest rate is 1.1%.

Please remember there is no free lunch. The interest rates will be higher when there is more risk in investing in the foreign currency.

After reading this, what do you think I should do? Should I invest in EverBank CDs to diversify my portfolio? What foreign currency CD should I buy? Should I buy single or multi-currency CDs? Please chime in with comments.

© 2011
Paul Cusick