The reverberations of the Brexit vote are being felt worldwide, and the British Pound Sterling (GBP) has declined sharply against all major currencies. It is currently at a 30 year low against the U.S. dollar (USD). Not surprisingly, the top trending searches on Google in the United States is “how to purchase British Pound Sterling.” As of today (June 27, 2016) it costs $1.32 (USD) to buy one GBP, that is down from $1.60 less than a year ago and $2.10 at its peak in 2007. Naturally, Americans recognize a bargain when they see it, especially entering the peak travel season. Unfortunately, buying currencies is not as easy as buying stocks because currencies do not trade on an exchange like stocks do. Here are some ways you can buy currencies and the associated risks that one should keep in mind.
Your Local Bank
For most people, the local bank is the quickest and easiest place to purchase GBP if planning a trip to Britain. You will pay a premium for the convenience but will get the physical currency to hold and use on your travels. For example, if the GBP is quoted at $1.32 USD, you may end up paying $1.45 after fees, which is still lower than its peak. The exchange rate will be much better if you purchase in the United Kingdom (U.K.) since there is a greater supply of GBP than your local bank in the U.S. will have access too.
Exchange Traded Fund (ETF)
If your intent in purchasing GBP is to speculate on the direction/value of the GBP, then an ETF is your best option. There are two popular ETFs that allow you to trade the GBP: FXB by Guggenheim or GBB by Barclays. Before buying these ETFs, pay close attention to the average daily volume of these funds which is a measure of liquidity. The higher the average daily volume, the more liquid (easily tradable) is the ETF.
I only include futures contracts for informational purchases and I would not recommend retail investors attempt to purchase futures contracts. Futures are derivatives which means the value of the contract is derived by an underlying asset. In this case, the underlying asset would be the GBP. When you buy a futures contract, you are agreeing to buy a fixed number of the underlying asset by a set date. Futures are traded on an exchange and in standardized quantities. For example, the futures contract for GBP, which is electronically traded on the Chicago Mercantile Exchange nearly 24 hours a day, requires the holder of the contract to purchase 62,500 GBP when the contract matures. At today’s conversion rate, that is equal to $82,500 USD (62,500 x $1.32).
I want to emphasize that trading currencies is very risky and should only be done by experienced investors. Buying a limited amount of GBP because you have an upcoming trip planned to the U.K. makes perfect sense, but this is very different from buying GBP because you are trying to speculate that the GBP will rebound against the dollar in the near future. Just as we never speculate on the market, so too do we advise our clients not to speculate on the GBP.