Currency ETF, Currency Exchange Traded Fund

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A currency ETF is an exchange traded fund that tracks a foreign currency. The first currency exchange tradedfund was launched by Rockville, Maryland-based Rydex Investments in 2005 in New York. It was called the Euro Currency Trust and was traded on the New York Stock Exchange (NYSE). This would appreciate in value with the strengthening of the Euro against the USdollar. By 2006, Rydex had added six more currency-based ETFs as part of its CurrencyShares series of funds. These currency ETFs included the CurrencyShares Australian Dollar (NYSE: FXA), British Pound Sterling (NYSE: FXB), Canadian Dollar (NYSE: FXC), Mexican Peso (NYSE: FXM), Swedish Krona (NYSE: FXS) and Swiss Franc (NYSE: FXF) funds.

Subsequently, Deutsche Bank’s db x-trackers launched the EONIA Total Return Index ETF in Frankfurt. This fund tracked the Euro. The bank again launched the Sterling Money Market ETF and US Dollar Money Market ETF (LSE). Both were traded on the London Stock Exchange (LSE).

How is a Currency ETF Traded?

Firms managing exchange traded funds buy currencies and hold them in a fund. They present the shares of this fund before thepublic for sale. Shares of an ETF can be bought on the stock exchange, just like one buys stocks. Each share of a currency ETF isvalued by investors at 100 times the exchange rate of the currency that is held. Currency ETFs are used to gain exposure to theworld’s largest financial market – the forex market.

Benefits of Currency ETF

Here are some benefits of currency ETFs:

  • These exchange traded funds provide manufacturers the opportunity to hedge against currency losses.

  • Currency ETFs create opportunities to invest in the highly popular foreign exchange market.

Risks of Currency ETF

The major disadvantages of a currency ETF are:

  • Since it is not easy to predict the direction of a currency, a currency ETF is a highly risky fund.
  • Currency exchange traded funds involve the payment of annual fees.

Foreign currency trading through currency ETFs has become highly popular among the professionally managed trading entities.

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