Currency ETF

A currency ETF or Exchange Traded Fund is a fund that deals in one national currency. A currency ETF can hold assets in any of the world’s currencies. Such funds offer investors and traders a focus on an individual nation and economy. A currency ETF offers benefits similar to single country stock funds. Currency traders following the Greek debt crisis and the travails of the Euro might be interested in a currency ETF that holds only Euros. A plausible strategy might be that when the Greek debt crisis, specifically, and, in general, the PIIGS debt crisis including Portugal, Italy, Ireland, and Spain is resolved the Euro might rebound sharply. An alternative could be a currency ETF dealing in Yen. The same sort of strategy would prevail in that the trader would believe that the Yen will go up substantially when the short and midterm effects of the earthquake and tsunami are dealt with.

Currency ETFs are a current hot item. It remains to be seen if a currency ETF is a better investment than simply trading the country’s currency by oneself. Many believe that an ETF focused on equities in a country is a better tool with which to profit from economic events. An ETF can simply hold a currency or it can trade the currency, typically versus the US dollar. A currency ETF that trades in any of the major currencies can trade against any of the other major currencies. However, many minor currencies only trade versus the US dollar. As such one might think of a currency ETF for a minor currency as also being a currency ETF for the US dollar or perhaps its reciprocal. Whether traders in an ETF are dealing in the post tsunami Yen or any other currency the skill of the traders will likely be more important than the particular currency which they are trading. If the ETF is of the “buy and hold” variety the choice of currency will be more important than choice of trader. However, the investor will be foregoing the profits available in Forex trading that come from the daily fluctuations in currency rates while waiting for an eventual big market move.

Investing in a currency ETF or an ETF that invests solely in one nation’s stocks has both an averaging effect and an exclusion effect and both can be detrimental to the investor. If one chooses to follow the fortunes of a single currency one may well have tied up all of one’s investment capital just when there is a big and promising market move in another currency pair. For a stock fund in one country one must remember that not all stocks perform equally, just like not all currency pairs perform equally. Picking the right stock can be more important than picking the right country. Picking when to trade the Euro, Yen, Rupee, Ruble, Real, and others can be more profitable than solely focusing on one currency to the exclusion of all others. A currency ETF can be like long term, buy and hold, investing. It can gain profits, or losses, and it can tie up investor capital to the exclusion of other opportunities.