Currency ETFs 101 | ETF Trends

Currency markets are among the sectors that exchange traded funds have opened up to investors, providing a liquid and transparent vehicle for trading currencies.

The ETFs can be used to diversify portfolios, but trading currencies is a notoriously risky and difficult endeavor.

Currency ETFs mirror the movements in the foreign exchange markets usually by holding cash deposits of the currency or by using futures contracts. Both have a high correlation to the actual currency over time, reports Esther Pak for Morningstar. Currency ETFs have also given all investors access to this once hard-to-reach area of the market.

There are two ways to go about a currency ETF investment. For one, there are country specific currency funds. An example is the CurrencyShares Swedish Krona (NYSEArca: FXS), which will play the upside of this currency against the movements of the U.S dollar. [ETF Chart of the Day: Leveraged Dollar ETFs]

Conversely, one way to play a rising U.S. dollar is with PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP), which tracks the greenback against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. [Best ETFs for Rising Dollar]