What Is Currency ETF?

Trade foreign curriencies through ETFs.

The range of exchange traded funds, or ETFs, has grown rapidly to provide investors access to a wide range of asset classes, including foreign currencies. ETFs are bought and sold on the stock market like any stock.

Benefits

Currency ETFs allow an investor to invest in an asset that reflects the value changes of foreign currencies without actually owning the currency. As a bonus, investors earn interest at a rate near the rate paid in the country of the currency.

Function

A currency ETF has deposits in the foreign currency that earn interest at that currency's current short-term rate. The ETF shares trade in dollars on the U.S. stock exchange, moving up and down in value in tandem with the foreign currency.

Identification

Representative currency ETF symbols for the major foreign currencies are. Euro, FXE; British pound, FXB; Canadian dollar, FXC; Japanese yen, FXY; and Brazilian real, BZF.

Significance

Currency ETFs can be used to diversify a portfolio into different currencies or to hedge investments in foreign stocks. A strong foreign currency can hurt foreign stock values in dollar terms, and a currency ETF could balance the effect of the currency value change.

Considerations

There also are currency ETFs that compare a basket of foreign currencies against the dollar. If the investor forecasts a strong dollar, she can invest in a fund such as the PowerShares DB US Dollar Bullish Fund, symbol UUP. A fund such as the US Dollar Bearish Fund, symbol UDN, will profit if the dollar falls.

Warning

There are risks involved in ETFs, as there are with any kind of stock. Make sure you understand the risks and the potential benefits before you invest.

References

• ETF Stock Encyclopedia: Currency ETF list
• Currency Trading: Using Currency ETFs