One reader wanted to know about foreign currency exchange traded funds (ETFs). Thanks to ETFs, foreign currency is a market the average, everyday investor can get exposure to an area that previously wasn’t accessible to them.
The rise and fall of currency has a lot to do with several factors, according to George D. Lambert for Investopedia. The value is impacted by economic growth, government debt levels, oil and gold prices, and more.
Just look at what happened recently in the United States: gross domestic product (GDP) slowed, government debt rose, oil and gold prices spiked. Suddenly, our dollar was hitting record lows against the yen and euro.
Currency ETFs replicate the movements of the currency in the exchange market either by holding currency cash deposits in the currency that’s being tracked, or by using futures contracts on the underlying currency.
Currency ETFs can either track the specific currency you’d like, or a group of them, as in the case of the DB G10 Currency Harvest Fund (DBV).
How they operate is cut-and-dry: when you sell it, if the currency has appreciated against the dollar, you’ll earn a profit. If the currency has dropped relative to the dollar, it’s a loss. Foreign currency ETFs are bought and sold just like regular ETFs, throughout the day.