Updated on March 13, 2023
A Currency ETF is an ETF (Exchange Traded Fund) which invests in foreign exchange (forex) and currencies. Currency ETFs invest in cash/currency deposits, foreign exchange derivative contracts and short-term debts in different currency denominations. It provides investors with exposure to the currency markets through a portfolio of currencies. These funds try to profit from fluctuations in the exchange rates of one or more currencies. These ETFs are passive investments and can be bought and sold on stock markets, like other ETFs.
Features of Currency ETFs
Features of Currency ETFs are:
1. The foreign exchange markets are the largest global markets. Currency ETFs provide a convenient and cost-effective option for exposure to currencies, which otherwise is not easy for retail investors.
2. Currency ETFs depend on factors affecting the currency markets like global positioning, internal political situation and interest rate movements.
3. Investors can use Currency ETFs for hedging, along with exposure to different foreign currencies.
Limitations of Currency ETFs
Limitations of Currency ETFs are:
1. Most currencies are not stable and can be subject to huge fluctuations, thus making these ETFs more risky in comparison to other forms of investments.
2. Currency prices are also dependent on political and global factors, apart from economic events, which can be quite tough to track for retail investors.