Currency ETFs (exchange traded funds) used to be off-limits for the average investor, but they have now become available in such a way that anyone with extra cash to invest can play the game of betting against currency values. Currency ETFs are essentially that: bets that one currency will outperform another currency.
How do currency ETFs work?
Currency values around the world are continuously fluctuating. In the past, only the big investors had the cash to make bets on these fluctuations, but now several currency ETFs have been established that track specific currencies, among them the euro, the Japanese yen and the US dollar. Currency trusts are set up, and shares of these trusts are sold as ETFs. This means you can buy shares of a specific currency trust, and then you can sell it for a profit or loss, depending on how much the value of that currency falls or rises in comparison to another currency. In essence, ETFs are bets against or for specific currency values.
What are the pros and cons?
ETFs are appealing because they are based on indices that are transparent and easy to track, and the concept behind ETFs is easy to understand. The downside of ETFs is the volatility and high risk for losses.
One of the main reasons for the recent popularity of ETFs is the falling US dollar value. Bets against the value of the US dollar have proven to be quite lucrative in the past, but of course this is a very risky bet, as what happened with past investments don't predict the future. Values of currencies can change in a matter of minutes, and large sums of money can be lost or gained very quickly. In general, currency ETFs are considered to be high-risk investments, and most financial advisors would counsel you to use only extra money for ETFs, while investing the main portion of your portfolio in safer investments.
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