Do you want to invest in currencies without setting up your own dedicated account for forex trading? Exchange-traded funds, most commonly known as ETFs, give you the power to invest in currencies without the complications, difficulties, and costs of traditional forex trading.
A currency ETF is a special exchange-traded fund that monitors the movement of a certain foreign currency against the US dollar (USD). Currency ETFs offer numerous benefits for investors interested in trading foreign currencies without the hassle or cost of establishing a dedicated forex account.
In this guide, we’ll look at the advantages, the disadvantages, and the strategies of using an exchange-traded fund to invest in foreign currencies. If you’re new to the world of currency trading, enroll in our Forex Foundation Course to learn foreign currency investing from A to Z before you begin.
How do currency exchange-traded funds work?
Forex traders make money by betting on the movement of foreign currency pairs. A pair of currencies could be the Swiss franc and the United States dollar, or the euro and the British pound sterling.
When one currency increase in value relative to another, a forex trader either earns or loses money based on their investment. Forex trading is a complicated, stressful, and time-consuming career, especially for people that opt to trade currencies daily.
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Currency exchange-traded funds replicate the fluctuations in the value of a currency without the day-to-day complications of forex trading. Like stocks, they’re traded on an exchange, making them much easier to buy or sell than real currency holdings.
Almost all currency ETFS are built around a specific foreign currency against the US dollar, although some are available for a basket of currencies (typically two or more currencies) against the United States dollar.
Currency ETFs aren’t the only type of exchange-traded fund for investors to buy. A wide range of exchange-traded funds, from commodity ETFS (such as gold or silver) to stock ETFs are available, each offering different advantages and disadvantages.
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What are the advantages of currency ETFs?
Exchange-traded funds have been around since the early 1990s, and since then they have become some of the most popular investments for people seeking to capitalize on changes in the value of currencies and commodities.
Since ETFs are traded during the day in the same way as a stock, they’re perfect for day traders that would like to capitalize on currency fluctuations without opening a specific account for forex trading.
ETFs generally have much lower portfolio turnover than other investments, making them a tax-efficient choice for investors. Investors are generally only taxed as they initiate a trade when buying or short selling ETFs.
Finally, ETFs are transparent and allow you to see exactly what you’re investing in, just like buying a currency would. This makes them the ideal substitute for people interested in investing in currencies without actually buying physical currency.
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How can you earn money from currency ETFs?
Earning money from currency ETFs is simple. If you purchase a currency ETF and its value increases, you make a profit. For example, if you invest in a euro ETF, you will earn a profit if the value of the euro increases relative to the US dollar.
If the value of the euro declines relative to the US dollar, however, you will make a loss. This is part of the risk of investing, and it’s something that any forex trader is likely to deal with at some point.
Just like it’s possible to profit from a rise in the value of a currency relative to the US dollar, it’s also possible to profit from a decline in the value of a currency. When you short sell a currency ETF, you earn money when its relative value decreases.
This is because when you short sell a currency, you actually borrow it from a broker with the promise to eventually return it. If, during your loan of the currency, it goes down in value, you can return it to the company and profit the difference in value.
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Why should you invest in currency ETFs?
There are many reasons to invest in currency ETFs. If you believe that a currency is overvalued – for example, you’ve noticed it’s at a historically high level and believe that it may be due to a credit bubble – investing in a currency ETF is a great way to capitalize on your beliefs and research.
Currency ETFs are also great for investing in currencies or getting started with the art of day trading without having to set up your own forex account. Since ETFs are bought and sold like any other stock, you can day trade them easily to capitalize on short-term movements, which isn’t possible with a mutual fund.
Finally, investing in currency ETFs teaches you important skills that can translate into a well-rounded knowledge of investing your money. The skills you learn from investing in currency ETFs can help you invest wisely in stocks, bond, and other exchange-traded funds for commodities such as gold and silver.
Are you worried about losing your investment? Read our blog on Protecting Your Capital to learn how to trade intelligently, whether you’re investing in ETFs, stocks, or commodities.
Are you ready to start investing in currency ETFs?
Whether you’re aiming to capitalize on an overvalued or undervalued currency or simply diversify your portfolio, currency exchange-traded funds are a wonderful choice.
Start searching for currency ETFs today and be sure to enroll in our Basics of ETF Trading course to learn the best tactics, strategies, and techniques for successful currency exchange-traded fund investing.