There’s been a lot of talk lately about the value of the dollar – is it up? Is it down? – which has been sending investors on the hunt for currency exchange traded funds (ETFs).
ETFs have made it possible for the average investor to get exposure to the world’s currency markets – the largest financial market in the world. Before they came along, investors often had to use futures contracts that involved large amounts of currency.
The first fund launched in late 2005, and it opened up a whole new world for people looking to capitalize on the movements in the foreign exchange.
An excellent article on Investopedia addresses the top issues and questions people might ask about investing in currencies. Among the facts:
- Currencies are not traded on a regulated exchange, there is no central governing body and no arbitration panel to settle disputes. Self-regulation has been very effective, because participants must both compete and cooperate with one another.
- In the foreign exchange market, prices are quoted to the fourth decimal point.
- Technically, you are not buying or selling anything in the currency market. All trades exist as computer entries.
- Currencies are traded in pairs, and when a trade is made, one is always long on one, short on the other.
Not all currency ETFs are created alike. They do track a currency, or a basket of them, from around the world.
Rydex‘s line of CurrencyShares are designed to hold cash and invest it with banks to get interest. WisdomTree‘s line of Currency Income funds seek to earn current income reflective of the money market rates in the country for which the fund is named. They are not, however, “money market” funds.