Have you ever wanted to invest in currencies without opening a separate trading account? Exchange-traded funds allow you to invest in currencies without the complexity, problems, or expenses associated with traditional forex trading.
ETFs’ goal is to provide general investors with low-cost, passive currency market exposure by investing in foreign currencies. The popularity of currency exchange-traded funds (ETFs) has surged among a variety of investors. It is the best and most cost-effective method for retail investors to invest in the FOREX market.
What are exchange traded funds?
ETFs are pooled investments that track foreign exchange and their holdings across many markets and are used to diversify portfolios. A currency ETF is a type of exchange-traded fund that tracks the value of a foreign currency in relation to the US dollar (USD). Currency ETFs provide a number of advantages to investors who want to trade foreign currencies without the inconvenience or expense of opening a specialized forex account.
As we all know, forex trading is quite volatile and is dependent on economic conditions, political environment, and interest rate. As a result, ETFs are used by investors for speculation, hedging, and safety. ETFs are similar to mutual funds in every way except for one. Unlike mutual funds, investors can purchase shares in an ETF through a brokerage account. As a result, one of the most prized investments in the modern market combines the ease of share trading with the benefits of mutual funds.
Furthermore, the popularity of exchange-traded funds is boosted by low-cost and diversified index fund management.
Despite the fact that ETFs were first introduced in 1993, they gained popularity only after the US economy was rocked by the 2008 financial crisis. Over five hundred and thirty billion dollars was invested in ETFs by US investors in 2008. With approximately two thousand, one hundred and seventy-seven trading on US stock exchanges as of May 2020, the total value has risen to more than $4.5 trillion.
Types of currency ETFs
There are two main types of currency ETFs. Let’s look at them below.
- ETFs are based on a single foreign currency versus the US dollar.
- ETFs are based on a basket of currencies (usually two or more currencies) versus the US dollar.
How do currency ETFs work?
You do not own the entire portfolio when you invest in an ETF. The underlying assets are still owned by the brokerage firm, so you only own a share of the fund. As an ETF investor, you will earn dividends from the fund’s assets. A brokerage business often purchases a number of underlying assets to contribute to the fund.
Despite the fact that ETFs provide investors with a varied portfolio, it should be remembered that the assets that make up an ETF may come from the same industry. ETFs are traded during the trading day in the same way that stocks are traded on a stock market asset. Shares in the ETF are sold to potential investors once it has been created.
How can currency ETFs help you make money?
It’s easy to make money using FX ETFs. You profit if the value of a currency ETF rises after you buy it. If you buy a GBP ETF, for example, you will profit if the GBP’s value rises in relation to the US dollar. However, if the GBP’s value falls against the US dollar, you will lose money. This is a risk of investing, and it’s something that every forex trader will encounter at some point.
It’s possible to profit from a currency’s growth in value relative to the US dollar, just as it’s possible to profit from a currency’s fall in value. When you short-sell a currency ETF, you profit when the price of the ETF falls in value. This is because when you short-sell a currency, you are borrowing it from a broker and promising to return it at a later date. If the currency loses value during your loan, you can return it to the company and profit from the difference in value.
Pros of trading using currency ETFs
- They’re straightforward
If you trade currencies the traditional way, you may find yourself faced with a difficult decision when it comes to picking which company, sector, or geographic region to invest in. Currency ETFs, on the other hand, are often designed to track a whole share market index, allowing you to gain exposure to the entire market with a single trade.
- Liquidity
During any trading day, you can buy and sell currency ETFs, like Invesco CurrencyShares® British Pound Sterling Trust (FXB), just like any other listed currency. In comparison to certain other off-market options, this makes them a convenient way to trade.
- ETFs are cost-effective
Currency ETFs measure the progress of a broad index. One can benefit from this strategy since the ETF management incurs reduced costs in managing the portfolio and hence does not need to pass on the higher fees associated with having someone actually managing the portfolio. ETF costs are often less than half of what a comparable traditional managed fund would cost.
- They lower your portfolio’s risk
Many first-time investors will buy a small number of shares. This means that their money will be concentrated, and they will be heavily influenced by the performance of a few companies. ETFs that track stock markets, on the other hand, provide investors with immediate access to a diverse group of firms. Because of the diversity, the risk of owning a single stock is greatly decreased.
Cons of trading using currency ETFs
- For investors who make smaller and more frequent investments, ETFs may have high trading expenses and commissions.
- Investors may be unable to keep track of market values because ETFs are not traded regularly. This can cause the sale to be delayed and money to be blocked.
- Technical inconsistencies can cause tracking index prices of funds to fail in rare situations.
- The proceeds from the selling of an ETF do not become available to the investor right away. Once the ETF settles, the funds are credited after two days. During this time, the investor loses the opportunity to reinvest their assets.
Conclusion
Currency exchange-traded funds (ETFs) provide strategic exposure to the currency market via an investing portfolio. ETFs make work easier for traders with no forex account. It is easy to make money using ETFs, and the process is seamless. Like any other trading method, forex ETFs have both advantages and disadvantages, which one should know before investing in them.
