Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 14: Target-Date Funds]
The foreign exchange market, or forex, is the largest, most liquid financial market in the world. Investors unwilling to create a separate account just to trade currencies can easily access currency moves through exchange traded fund products instead.
Investors who want exposure to a forex exchange market without dealing with futures or directly with the forex market may be better suited trading in currency ETFs. Currently, currency ETFs cover most popularly traded international currencies.
Currency ETFs try to reflect the performance of a single currency or a basket of currencies. ETF providers structure their currency ETF products to try to reflect the movements of a currency in a foreign exchange market by holding foreign currencies directly, foreign currency denominated short-term debt instrument, derivatives or swaps.
For instance, the Guggenheim CurrencyShares suite of currency ETFs hold the foreign currencies directly through foreign currency-denominated deposit accounts – the accounts also accrue interest, which is paid out to shareholders after accounting for fund operating costs. The WisdomTree and PowerShares currency ETFs hold futures contracts or swaps to achieve their target objectives.