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Forex ETF

By: EconomyWatch Date: 28 July 2009

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Forex ETF or Forex Exchange Traded Funds can be thought of as a stock market existing within the forex market. The Forex ETF firms create ‘forex traded funds’ through buying and holding of foreign currencies. Later on, these funds are sold as shares and traders can buy any number of stocks for that fund.

The most commonly used currency is the USD in forex ETF. A shareholder of the forex ETF funds makes money when the prices of the term currency improve against the USD.

Types of Forex ETFs

Forex market deals in many currencies. Therefore, many specialized or diversified forex ETFs have emerged with a focus on different number of currencies. They are:

Forex ETFs which track single currency: These firms buy only one currency and their share represents a fixed amount of that currency. One can invest in the:

Canadian Dollar Trust (FXC)
British Pound Trust (FXB)
Euro Currency Trust (FXE)
Currency Swiss Franc Trust (FXF)
Australian Dollar Trust (FXB)

Forex ETFs that track a number of currencies based on their correlation: Funds like PowerShares DB U.S. Dollar Bearish (UDN) and PowerShares DB U.S. Dollar Bullish (UUP) invest in currencies like:

Japenese Yen
Euro
Swedish Krona
British Pound
Canadian Dollar
Swiss Franc

In these ETFs, the ratio of currencies differs from one fund to another.

Forex ETFs that track currency indexes: There are very few firms that operate under this category. The DB G10 Currency Harvest Fund (DBV) is a popular example.

Advantages of Forex ETF

Tapping the huge potential of the forex market, the forex ETF has attracted many investors with its ease of comprehension and similarity with stock trading.

Here are the advantages:

A trader can buy or sell ETF through a broker just like as in the stock market.
It diversifies the portfolio and decreases risks.
Forex ETF work with absolute transparency. They disclose the holdings of the funds daily.

Forex ETF: Disadvantages

Forex ETFs, like all other forex investment, have their flip side as well:

ETFs are traded like stocks thus cost a lot of brokerage.
You do not have the complete control over your investment. The ETFs are predefined and you choose the one that most suits you. Even then, they might have a currency share that you don’t like.

With its ease of operation, the forex ETF continues to be popular with investors and look promising for the future as well.