In a diversified portfolio, the asset selection does not need to stop at stocks and bonds. Enter currency ETFs, financial tools that provide exposure to foreign exchange markets without the complexities of traditional forex trading. Intrigued by the idea of investing in world economies through currencies? This article covers some of the top currency ETFs, their prospects and why they’re worth considering for your investment portfolio.
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5 Best Currency ETFs
These currency ETFs showcase some of the most exciting prospects in today’s currency markets.
1. Invesco CurrencyShares Euro Trust (NYSEARCA: FXE)
FXE offers exposure to the European currency without opening a foreign currency account or trading in the forex market. With a market value of $300 million (based on its current price of $103.62 and outstanding shares of 2.9 million) as of July 14, 2023, it has solid market standing and the potential for growth amid Europe’s recovering economy. This option makes a good addition to your portfolio as it provides a diversified and liquid way to gain exposure to the euro, one of the world’s most widely traded and influential currencies.
2. WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU)
USDU provides a broad exposure to the U.S. dollar against a basket of 10 worldwide currencies. The fund aims to give investors exposure to the appreciation of the U.S. dollar, which can benefit from strong economic growth, rising interest rates and geopolitical uncertainties. USDU’s market cap as of July 14, 2023, sits at $2.02 billion. Its value proposition hinges on the strength and stability of the U.S. economy, making it an attractive option for risk-averse investors.
3. Invesco CurrencyShares Japanese Yen Trust (NYSEARCA: FXY)
FXY offers investors exposure to the Japanese yen. As Japan’s economy continues to innovate and adapt, FXY provides potential value to investors keen on Asian markets. The FXY has a market value of $178 million as of July 14, 2023, and has the potential to appreciate if the yen strengthens from factors such as Japan’s economic recovery, fiscal stimulus or geopolitical tensions. FXY makes the list because the yen is believed to be undervalued relative to the dollar and the FXY offers a low-cost and liquid way to access the Japanese currency market.
4. Aberdeen Standard Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (NYSEARCA: BCD)
BCD tracks the performance of a basket of commodity futures contracts with longer maturities, such as energy, metals, agriculture and livestock. The fund aims to provide exposure to the commodity market without generating K-1 tax forms, which can be complex and costly for investors. As of July 14, 2023, it has a market cap of $267.5 million. The appeal of this option hinges on the fact that commodities can benefit from the recovery of the global economy, inflationary pressures and the demand for green energy.
5. iShares Currency Hedged MSCI EAFE ETF (NYSEARCA: HEFA)
HEFA gives investors exposure to large- and mid-cap equities in Europe, Australasia and the Far East, while hedging against foreign exchange risk. The fund has the potential to benefit from the economic recovery and growth in Europe, Asia and Australia, as well as from the low interest rates and stimulus measures in these regions. The fund has a market value of $625.9 million as of July 15, 2023, and aligns with the investment goals of those seeking long-term capital appreciation and diversification while minimizing currency risk.
What is a Currency ETF?
Currency ETFs are exchange-traded funds (ETFs) that invest in foreign currencies. They can either track a single foreign currency or a basket of currencies, providing investors with exposure to forex markets without buying or selling currencies directly.
Benefits of Investing in Forex ETFs
Some upside of investing in forex ETFs include:
- Diversification and hedging: Forex ETFs can provide geographic and financial diversity to an investment portfolio and hedge against currency risk.
- Accessibility: These funds offer an easy way to gain exposure to foreign exchange markets without needing to engage directly in complex forex trading.
- Flexibility and liquidity: Forex ETFs can easily be bought and sold on exchanges like stocks, providing high liquidity and flexibility.
Drawbacks of Investing in Forex ETFs
- Exchange rate risk: Fluctuations in currency exchange rates can negatively impact the value of forex ETFs.
- Inflation: A decrease in the value of a foreign currency from inflation can affect the return on investment.
- Geopolitical risk: Political instability and economic policy changes can affect currency values.
- Tracking error: Currency ETFs may not always accurately reflect the underlying currency’s price because of fees, expenses, market disruptions or other variables, resulting in potential differences in performance.
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Other Ways to Invest in Currency
While currency ETFs offer an easy and accessible way to invest in foreign currencies, they aren’t the only method available. Here are other ways to invest in foreign currencies.
Forex Trading
Forex trading involves directly buying and selling currencies on the highly liquid foreign exchange market. Forex traders aim to profit from the fluctuations in exchange rates between different pairs of currencies. Staying profitable requires considerable knowledge and expertise.
Mutual Funds
Currency mutual funds are pooled investments that allow investors to buy shares of foreign currencies portfolios and use complex strategies, including hedging, to manage risks and generate returns.
CDs and Savings Accounts
Foreign currency certificates of deposit (CDs) and savings accounts allow you to save money in a foreign currency, providing currency exposure with potentially less risk than forex trading or mutual funds.
Foreign Bond Funds
These funds invest in bonds issued by foreign governments or corporations, providing both exposure to foreign currencies and income from bond yields.
Multinational Corporations
Investing in multinational corporations that operate in multiple countries can provide indirect currency exposure, as these companies often earn significant revenues in foreign currencies.
Compare Currency ETFs
Capitalizing on Currency: Your Guide to Forex ETFs
Currency ETFs offer an innovative way to diversify your investment portfolio while capitalizing on the potential of global markets. Whether you’re drawn toward the USD’s stability, the euro’s recovery potential or the exciting prospects of Asian currencies, these top five ETFs offer a solid starting point. Remember, each investment strategy comes with its own set of risks and rewards, so align your choices with your risk tolerance, financial goals and market insights.
Frequently Asked Questions
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It depends on your investment objectives and risk appetite. Currency ETFs can provide diversification and exposure to foreign economies but also come with risks, such as exchange rate fluctuations.
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Yes, there are ETFs such as Grayscale Bitcoin Trust (GBTC) and the Bitwise 10 Crypto Index Fund (BITW) that track the performance of digital currencies like Bitcoin and Ethereum, but they also carry high volatility and risk.
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A currency-hedged ETF is a fund that invests in foreign assets but uses currency forwards or other derivatives to offset the impact of foreign currency fluctuations on the returns of those assets.
