BUSINESS: What are currency ETFs and are they for you?

Dices cubes to trader. Cubes with the words SELL BUY on financial chart and columns of quotations as background. Selective focus

Dices cubes to trader. Cubes with the words SELL BUY on financial chart and columns of quotations as background. Selective focus

There are multiple investment vehicles in the digital age, with exchange-traded funds (ETFs) one that can be focused on an array of alternative asset classes.

However, ETFs aren’t particularly well known amongst some investors, while as a speculative vehicle, it’s often overshadowed by contracts for difference (CFDs) and spread betting.

In this post, however, we’ll explore the concept of ETFs further, while appraising currency products and their viability from the perspective of investors.

What is a Currency ETF?

In simple terms, an ETF is a fund that’s listed and traded on the stock exchange. In terms of functionality, they’re similar to index mutual funds, apart from the fact that they mirror stock trading more directly.

There are numerous types of ETF available, as this type of investment vehicle can include everything from stocks and commodities to fixed-income products like foreign currency.

Stocks are represented by entities such as Nifty ETF, while an Index fund is mainly considered to be a passive asset class that enables investors to purchase a pool of securities in a single transaction.

In the case of currency ETFs, these entities feature an array of international pairs, including major and high-lighly liquid assets such as EUR/USD.

Interestingly, currency ETFs are often used for hedging purposes, as anyone who has international currencies in their portfolio is significantly exposed to daily price movements.

Currency ETFs can also be widely used to make long-term macro bets on specific countries and investment themes, including volatile commodities such as oil.

What Do You Need to Know About Currency ETFs?

Before you enter into any currency ETF, you’ll need to determine precisely what type of exposure you want. This means identifying whether you want to adopt a position that’s wrong or short against one or a basket of currencies, ideally featuring the dominant greenback.

For reference, the majority of such funds are “short dollar” strategies, which make you money when the dollar appreciates against its various counter-currencies.

In fact, 29 of the applicable 39 currency ETFs are short dollar funds, with this trend likely to continue as the greenback continues to appreciate post the coronavirus pandemic.

It’s also worth considering the welcome bonus offers available when you open a trading account, as they can afford you access to free capital to be deployed when you start wagering with real money.

This, when aligned with the use of a demo account to hone your skills and gain risk-free experience in a simulated, real-time market, enables you to make the most of your capital while minimising your overall exposure to risk.

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