Currency ETFs are pooled investment vehicles that hold foreign currency assets and trade on the stock exchange like shares. They aim to replicate the exchange rate movements of a foreign currency or a basket of currencies against the Indian rupee. For example, a USDINR ETF will track the value of the US dollar relative to the Indian rupee, and its price will increase or decrease accordingly.
Currency ETFs can be classified into single-currency ETFs and basket currency ETFs. Single currency ETFs focus on one foreign currency, such as the euro, the US dollar, or the British pound. Basket currency ETFs invest in a group of currencies that share common characteristics, such as emerging market currencies, Asian currencies, or European currencies. Let’s understand if investing in them is good for you.
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Currency ETFs function through the possession of deposits of foreign currency or derivatives contracts. These instruments mirror the fluctuations in exchange rates of the respective underlying currency or currencies. The fund manager of an ETF will buy or sell foreign currency assets to maintain the desired exposure and track the benchmark index as closely as possible.
Currency ETFs are listed and traded on the stock exchange like shares. As an investor, you may buy or sell units of this ETF through your broker or online trading platform. The price of this ETF unit relies on the demand and supply in the market, as well as the exchange rate movements of the underlying currency or currencies.
Currency ETFs offer unique advantages if you want to diversify your portfolios and hedge against currency fluctuations. Some of these advantages are:
Some drawbacks and challenges of these ETFs are as follows:
Investing in currency ETFs is similar to investing in any other exchange-traded fund. Here is what you need to do
Currency ETFs are an innovative and alternative investment option if you seek diversification or plan to hedge against currency fluctuations. They offer exposure to the foreign exchange market without the need for complex forex transactions. However, they also involve high volatility and uncertainty due to exchange rate movements.
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