Why Currency ETFs Haven't Caught On Yet | ETF Trends

The currency segment of the exchange traded fund industry has been standing in the shadows of the fixed-income, commodities and equity ETFs. Why has this sector been ignored by investors lately?

“Currency funds are a poor long-term investment due to paltry expected returns,” Michael Rawson, analyst at Morningstar said, adding that low cash yields are likely to underperform even inflation over time.

Total assets in U.S. exchange traded funds and notes stood at $1.2 trillion at the end of April. Currency ETFs held $6 billion and currency ETNs accounted for $206 million, according to data from the ETF Industry Association.

The currency ETFs let individuals trade these markets, although currency speculation is notoriously difficult.

Although the currency or forex market trades about $4 trillion per day, low yields have taken the gusto out of currency ETFs. Furthermore, foreign exchange gains are included in some international equity and bond portfolios, which makes currency ETFs void for certain investors and financial advisers, reports Gertrude Chavez-Dreyfuss for Reuters.

Currency ETFs are investments in interest-yielding bank accounts focused on the currency it tracks, and investors get cash returns minus or plus any change in exchange rates. Also, currency ETFs, which trade like stocks, track the change in the value of the underlying currency against the U.S. dollar. Plus, certain foreign countries have different tax rates for gains, so this has to be factored into the equation. [Currency ETFs Look to Fed for Clues]