What Are They?
- Currency ETFs (exchange-traded funds) track a singe foreign currency or basket of currencies by using foreign cash deposits or futures contracts. For the ETFs that use futures, excess cash is usually invested in high quality bonds, typically US Treasury bonds. The management fee is deducted from the interest earned on the bonds.
- Currency ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with an underlying currency exchange rate. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
- You should be able to tell whether an instrument is an ETF or an ETN from the name. In the list above, mouse over the ticker symbol to see the name, or click on it to see the name, more details and articles.
Why & How To Use Them
- Currency ETFs and ETNs are not particularly attractive for long term investors looking to build a diversified portfolio, because, unlike stocks, currencies may not trend up over time -- low-interest bearing cash is not a "productive" asset. Long term investors looking to diversify out of the US are generally better off buying foreign stock or bond ETFs.
- Currency ETFs and ETNs may be attractive to investors looking to hedge their exposure to the dollar or to "bet against" the dollar.
- Currency ETFs and ETNs can also be useful for non-investment purposes, such as hedging a transaction in a foreign currency.
What to Look Out For
- Currency ETFs tend to have fairly high annual expense ratios, and the high turnover due to the use of futures may lead to higher than average trading costs.
- An alternative to currency ETFs is simple foreign currency bank deposits. While they can't be managed as easily in a single brokerage account, the may pay higher interest rates than the yield on the currency ETFs.
- ETFs that hold futures contracts and Treasury bonds have different tax status than equity ETFs. Interest on bonds is generally passed through as ordinary income, while capital gains on the futures contracts are usually taxed as though 40% of the gains are short-term and 60% long term. Check carefully with an accountant.
- Currency ETFs that use futures may diverge significantly from their underlying currency. In contrast, currency ETNs should track the currency accurately.
- You can track currencies' performance on Seeking Alpha's Currencies Data Dashboard.
- For discussion of currency ETFs versus ETNs, see Matt Hougan's iPath's New Currency ETNs vs. CurrencyShares ETFs: Room For Both?. See also Pause For Concern On Chinese Currency ETN (Gary Gordon).
- Discussion of the ETFs and ETNs themselves: New Emerging Asian Currency ETN Focuses on 'Current Income (Jonathan Liss), Rydex's CurrencyShares ETFs: The Expensive Truth (Bryan Moore), Currency ETFs: Some Pluses and Minuses (Abnormal Returns), The New Currency ETFs Add Little For Investors (David Andrew Taylor), Move Over CurrencyShares: PowerShares Launches Two Currency ETFs (IndexUniverse), ELEMENTS Currency ETNs Aim to Outperform Comparable ETFs (Matt Hougan), Chinese, Indian Currency ETNs Launch (Matt Hougan), Barclays Launches a Carry-Trade Currency ETN (Murray Coleman).
- Discussion of investment strategies using these ETFs: Hedging a Weakening Dollar With Currency ETFs (Roger Nusbaum), Which Currency ETF is the Best Hedge Against the Dollar? (Roger Nusbaum).
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.