Reviewed by Aug 26, 2020| Updated on
Currency Exchange Traded Funds (ETFs) are those ETFs that are intended at offering an exposure to investors on overseas currencies. Currency ETFs are generally managed passively and tracks an underlying currency and its holding in a particular nation or group of nations.
Understanding Currency ETF
The forex (foreign exchange) market is the largest market for trading currencies in the world. Currency ETFs offer a strategic exposure of investment to the forex markets via a portfolio of currencies. Investors who invest in these funds get exposure to foreign currencies and their capability to alleviate risks in the foreign exchange market.
The increasing popularity of currency ETFs provides investors with a perfect and economical way to indulge themselves in trading currencies in the regular trading sessions.
Securities issued by the government and currencies are generally considered safer investment options. However, currencies are considered to possess the highest level of risk between the two. Also, currencies can be volatile at times and should be considered as a significant factor when planning your investment strategies. The value of a currency is typically driven by economic conditions, political stance, and interest rates. Investors can make use of currencies for hedging, speculation, and safety.
Trading currencies is considered to be a speculative trade based on the spot exchange rates. The managers of currency ETFs try to meet the objectives of ETFs through various investment strategies. Currency ETFs can involve cash deposits, short-term bonds underlined in a currency, and overseas derivative contracts. Previously, these markets were accessed only by experienced traders. However, the advancements in the exchange-traded funds in the recent past has made currency markets accessible to almost everyone.
Factors to consider before you invest
- Investors must know that investing in currency ETFs can be risky as they are exposed to volatility.
- Investors must consider political stability and economic conditions of a country before deciding on a particular currency.