These days, more attention than ever before is being paid to global currencies. Once a market that was a challenge to access, currency exchange traded funds (ETFs) have turned the tables. Currency ETFs are not only a portfolio staple of many smaller investors’ portfolios, but now advisors can invest in them for their clients with ease.
The foreign exchange market, also known as the forex, is the largest market in the world. In 2007, for example, it garnered $3.2 trillion worth of transactions each day. It’s the largest, most liquid financial market because the market is driven by the need to exchange world currencies. Because of its gargantuan size, it’s often referred to as “the quiet giant” of finance.
Unlike most other trading, such as futures, stocks or options, forex trading doesn’t happen on an exchange. It’s not controlled by any governing body, has no central exchange and there are no clearinghouses involved guaranteeing trades. The forex is a global network, made up of banks, corporations and individuals, and it’s open 24 hours a day.
The forex is also the world’s most liquid market – there are always ready and willing buyers and sellers for the currency someone is seeking to trade.
Currencies do not gain in value forever. In fact, factors such as inflation and monetary policy tend to keep currencies from gaining and losing value indefinitely. This is because the foreign exchange market is all about opposites and relativity. As one currency gains value, another has to be losing.
Investing in the forex market helps investors diversify and hedge with currencies, which may help reduce risk while maintaining an upside potential.
All About Currency ETFs