As editor of Morningstar ETFInvestor I've had to work fast and furious to keep up with the explosive growth in the ETF market. Just this year, more than 200 new ETFs have been launched, and a few of these new offerings have really caught on with investors. Here's my take on some of the most popular ETFs from the class of 2007.
CurrencyShares Japan Yen Trust (FXY)
As its name suggests, this ETF provides shareholders exposure to the Japanese yen. Investors have flooded it with cash since its January launch, no doubt looking for a way to profit from the dollar's recent weakness. But short-term currency bets can be difficult to pull off successfully. Not only do you have to handicap a myriad of complex economic factors, but you've also got to get the timing right. Even experienced economists with reams of data at their disposal have a tough time making accurate currency calls. 2005 provides a case in point. Citing the burgeoning U.S. trade deficit and our growing fiscal deficit at home, many economists predicted that the greenback would weaken that year. Nevertheless, the dollar stubbornly rose in value against major currencies in 2005, and a bet against it would have gone sour fast.
Sure, I think it makes sense for long-term portfolios to have exposure to a variety of currencies, but the most effective way to do that is by investing in a broadly diversified foreign equity fund that doesn't hedge its currency exposure. That brings us to the next-most popular new ETF.