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 Forex
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
ETFs have made entering the currency market much easier than it used to be. Prior to the launch of currency-related ETFs in 2005, the forex was not an easy one to reach. Today, currency traders who utilize ETFs can simply buy and sell ETF shares like stock shares while getting currency exposure.
Investors large and small might find this simplified access appealing, especially when you’re talking about a market that’s open 24 hours a day.
If you’ve been considering incorporating currency ETF strategies into your clients’ portfolios, there are an increasing number of both ETFs and exchange traded notes (ETNs) to get the exposure you want.
There’s no need to be bound to your computer monitoring exchange rates. You can also get exposure to a wide range of currencies without necessarily having to understand or consider the day-to-day volatility of the market. But monitor currency ETFs closely, and don’t treat them as buy-and-hold tools – this market moves quickly.
Currency ETFs track the performance of a single currency or a basket of currencies that can be used to easily access certain currency strategies, such as the carry trade. ETF providers structure their currency ETF products to try to reflect the movements of a currency in a foreign exchange market by holding currencies directly or in currency denominated short-term debt.
Currency ETFs cover most major international currencies, and there are a number more in registration.
The eight major countries that make up the currency trading market are the United States, the Eurozone (Germany, France, Italy and Spain), Japan, United Kingdom, Switzerland, Australia, Canada and New Zealand. There are also other global currency ETFs available beyond the eight major currencies, including the Russian ruble, Brazilian real and Indian rupee.
To view and compare currency ETFs, visit the ETF Analyzer. Because trends move quickly in currency markets, be sure to utilize the alerts tool in order to stay on top of trading opportunities in currency ETFs.