Exchange-traded funds (ETFs) are a great way to benefit from changes in currencies. They offer a simpler way to trade on the markets. We break-down what an ETF is and what some examples would look like.
How Currency ETFs Work
Investors alike have been using ETFs instead of mutual funds to track equity indexes. Some advantages of using ETFs include:
- Flexible to use
- Tax efficient
- Easier to trade just like a stock
- Better transparency
ETFs are a lot like stocks meaning what you can do with a stock, you can most likely do the same with an ETF. This can include things such as shorting them, putting them in margin accounts, or even placing limit orders on ETFs. They also have a lower portfolio turnover so traders are only taxed when a trade is initiated. The transparency of an ETF is fantastic at showing their exact funds so you know what you have invested in.
Examples of Currency ETFs
When you decide to purchase ETFs there are many options available to choose from. As a quick example we can look at the CurrencyShares Swiss Franc Trust (NYSE:FXF). This ETF is available to purchase and tracks the Swiss franc. If you thought the price of the Swiss franc was to rise against the U.S. dollar, you would buy this ETF.
There are also ETFs that feature a group of different currencies that you can track. For example if you were to purchase the PowerShares DB US Dollar Bullish (NYSE:UUP), you would be tracking the US dollar against the British pound, Canadian dollar, Swedish krona, Japanese yen, and the Swiss franc. If you believe the U.S. dollar will be falling against all of these other currencies, you would buy this ETF.
What to Watch Out For
There are some risks when you begin to trade with currency ETFs. These include things such as political problems, national debt, government defaults, and trade deficits. All of these can have an impact on ETFs. If you don’t keep an eye on political events or global news, the currency you are investing in may end up going down without you having enough time to react.
Where to Go Next
ETFs are a unique way to trade currencies just like you would a stock. Consider investing some of your time and money into ETFs to see the potential power they really hold. Follow this link to see a very comprehensive list of currency ETFs: