Trading Currency Etfs
Currency exchange traded funds (ETFs) are funds which enable traders to profit from the most liquid financial market on this planet, the forex market. Currency ETFs are one of the newest trading instruments available. Just like traditional exchange traded funds, currency ETFs too are traded just like stocks. The only difference is that they track foreign currencies, not indexes or stocks.
ETF firms create currency exchange traded funds by buying and holding foreign currencies in a fund. Then the shares of the fund are made available for traders. Whenever the foreign currency price rises (usually against US Dollar, USD) the whole value of the ETF rises and so as the price of shares. Whenever the foreign currency falls opposite events occurs.
Currently there are number of currency ETFs available for trading which can be classified into three broad categories.
- ETFs which track Single Currencies: Here each share of the currency ETF represents a fixed amount of a single foreign currency. Examples include British Pound Trust (FXB), CurrencyShares Euro Trust (FXE), CurrencyShares Swiss Franc Trust (FXF), Australian Dollar Trust (FXB), CurrencyShares Japanese Yen Trust (FXY), Canadian Dollar Trust (FXC), etc.
- ETFs which track a number of currencies: Usually these are currencies which show greater correlations. Examples include PowerShares DB U.S. Dollar Bearish (UDN) and PowerShares DB U.S. Dollar Bullish (UUP); tracking currencies include Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swiss Franc (CHF) and Swedish Krona (SEK). The number and proportion of currencies can vary with fund to fund.
- ETFs which track currency indexes: These are fewer in number. Example includes DB G10 Currency Harvest Fund (DBV) – it track Deutsche Bank G10 Currency Future Harvest Index.
There are many advantages of trading currency ETFs over trading currencies, stocks and other ETFs.
- They are easy to trade. They are traded like stocks enabling traders to buy, hold and sell them through a broker.
- They are instruments which track the world’s most liquid market.
- They are good options for diversifying the portfolio.
- They offer better tax savings than stocks.
- They enable traders to invest in growing economies across the world which are otherwise hard to reach.
- They are good instruments to hedge against decreasing dollar rates.
- They are transparent instruments are the ETF firms have to disclose the exact holding of funds on daily basis.
- They are flexible trading instruments to suit different trader styles and risk tolerance levels.
- They can be shorted and margin traded. They also can be used in complex trading strategies.
But like any other trading instrument there are also risks. Foreign currency rates can quickly fall with global economic changes, policy changes and political issues. In order to profit traders should be certain about their fund selection and market timing.