What is an ETF? — Part 15: World Currencies
June 13th 2012 at 8:00am by Tom Lydon
Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 14: Target-Date Funds]
The foreign exchange market, or forex, is the largest, most liquid financial market in the world. Investors unwilling to create a separate account just to trade currencies can easily access currency moves through exchange traded fund products instead.
Investors who want exposure to a forex exchange market without dealing with futures or directly with the forex market may be better suited trading in currency ETFs. Currently, currency ETFs cover most popularly traded international currencies.
Currency ETFs try to reflect the performance of a single currency or a basket of currencies. ETF providers structure their currency ETF products to try to reflect the movements of a currency in a foreign exchange market by holding foreign currencies directly, foreign currency denominated short-term debt instrument, derivatives or swaps.
For instance, the Guggenheim CurrencyShares suite of currency ETFs hold the foreign currencies directly through foreign currency-denominated deposit accounts – the accounts also accrue interest, which is paid out to shareholders after accounting for fund operating costs. The WisdomTree and PowerShares currency ETFs hold futures contracts or swaps to achieve their target objectives.
Investing in the forex market helps investors diversify and hedge with currencies, which may help reduce risk while maintaining an upside potential. For instance, individuals holding assets denominated in a foreign currency are exposed to currency risks – if the foreign currency weakens compared to the U.S. dollar, the investor’s foreign investments will also depreciate in value once converted back to U.S. dollars.
Unlike the stock market, currencies usually oscillate between a support and resistance level over the long-term. Inflation and monetary policy, for example, prevent currencies from increasing in value indefinitely. As one currency gains value, another has to depreciate to balance the effect out.
List of foreign-currency exposure ETFs:
- CurrencyShares Australian Dollar Trust (NYSEArca: FXA)
- CurrencyShares Canadian Dollar Trust (NYSEArca: FXC)
- CurrencyShares Swedish Krona Trust (NYSEArca: FXS)
- CurrencyShares Chinese Renminbi Trust (NYSEArca: FXCH)
- CurrencyShares Swiss Franc Trust (NYSEArca: FXF)
- CurrencyShares Euro Trust (NYSEArca: FXE)
- CurrencyShares Japanese Yen Trust (NYSEArca: FXY)
- CurrencyShares British Pound Sterling Trust (NYSEArca: FXB)
- PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP)
- PowerShares DB US Dollar Bearish Fund (NYSEArca: UDN)
- PowerShares DB G10 Currency Harvest Fund (NYSEArca: DBV)
- WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB)
- WisdomTree Dreyfus Emerging Currency Fund (NYSEArca: CEW)
- WisdomTree Dreyfus Brazilian Real Fund (NYSEArca: BZF)
- WisdomTree Dreyfus Commodity Currency Fund (NYSEArca: CCX)
- WisdomTree Dreyfus Indian Rupee Fund (NYSEArca: ICN)
- WisdomTree Dreyfus Japanese Yen Fund (NYSEArca: JYF)
- WisdomTree Dreyfus South African Rand Fund (NYSEArca: SZR)
Exchange traded notes:
- iPath GBP/USD Exchange Rate ETN (NYSEArca: GBB)
- iPath JPY/USD Exchange Rate ETN (NYSEArca: JYN)
- iPath EUR/USD Exchange Rate ETN (NYSEArca: ERO)
- iPath Asian & Gulf Currency Revaluation ETN (NYSEArca: PGD)
- iPath Optimized Currency Carry ETN (NYSEArca: ICI)
- iPath GEMS Index ETN (NYSEArca: JEM)
- iPath GEMS Asia 8 ETN (NYSEArca: AYT)
- Market Vectors Indian Rupee USD ETN (NYSEArca: INR)
- Market Vectors-Chinese Renminbi/USD ETN (NYSEArca: CNY)
- ProShares Ultra Euro (NYSEArca: ULE)
- Proshares Ultra Yen (NYSEArca: YCL)
- ProShares UltraShort Euro (NYSEArca: EUO)
- ProShares UltraShort Yen (NYSEArca: YCS)
- Market Vectors Double Long Euro ETN (NYSEArca: URR)
- Market Vectors Double Short Euro ETN (NYSEArca: DRR)
- PowerShares DB 3x Long US Dollar Index Futures ETN (NYSEArca: UUPT)
- PowerShares DB 3x Short US Dollar Index Futures ETN (NYSEArca: UDNT)
For past stories in this series, visit our “What is an ETF?” category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.