Currency trading with ETFs for EUR, USD and more

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ETFs have opened the door to previously hard-to-reach corners of the market, including foreign stocks, commodities and alternative asset classes.

Currency ETFs in particular have attracted increasing interest from investors and traders alike, as they greatly simplify the challenges associated with entering the forex market. [see How To Take Profits And Cut Losses When Trading ETFs].

How currency ETFs work

Currency ETFs attempt to replicate the movements of a currency in the foreign exchange market (forex) against the US dollar (USD), or a basket of currencies. This is done by using cash deposits, such as holding euros or Swiss cash, or by using futures and swaps to gain desired exposure. [see 101 ETF Lessons Every Financial Advisor Should Learn].

If you believe that the euro, another active global currency or a basket of currencies will rise or fall against the USD, currency ETFs offer a way to take advantage of this. When you buy a currency AND F, you bet the price of the currency will go up – sell it short and you bet the price will go down. It is a quick way to capitalize on forex movements without opening a separate forex trading account, which has its own rules, regulations, fees / spreads and brokers.

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What is the difference?

There are two main types of currencies AND F products: those that reflect a specific currency in relation to the USD, and those that reflect a basket currencies against the USD.

A specific currency AND F, like the CurrencyShares Euro Trust (FXE A), follows the euro /USD currency pair. Figure 1.shows the extent to which the AND F followed the movements of the euro /USD (pink) over a period of eight months.

A basket of currencies AND F on the other hand, like the Dreyfus Emerging Currency Fund (HAVE A), invests in several currencies compared to USD. In this case, the AND F will increase in value if these currencies perform on average better than the USD [see King Dollar ETF Database Portfolio].

The table below lists the currency specific exchange traded products (ETPs).

Teleprinter Cash Expense ratio
(FXE A) euro 0.40%
(FXY C +) Japanese Yen 0.40%
(FXA A-) Australian dollar 0.40%
(FXC A) Canadian dollar 0.40%
(CYB A +) Chinese yuan 0.45%
(FXF B +) Swiss franc 0.40%
(BZF A-) Brazilian real 0.45%
(FXB A-) Pound sterling 0.40%
(ICN A) Indian rupee 0.45%
(FXS B +) Swedish crown 0.40%
(FXSG ) Singapore dollar 0.40%

FTEs in the currency basket include:

Teleprinter Basket Expense ratio Strategy
(UUP A) US Dollar (Bullish) vs. Basket 0.80% Only buy futures contracts in USD against other major currencies (basket).
(HAVE A) Emerging currency 0.55% Invest in emerging currency markets.
(DBV A-) G10 currency harvest 0.81% Long currency futures contracts with the highest interest rates in the G10 and short currency futures contracts with the lowest interest rates.
(CCX B-) Commodity currency 0.55% Invest in currencies linked to commodities.
(HERE VS) Currency transport 0.65% Invest in high yielding G10 currencies by borrowing in low yielding G10 currency markets – carry trade.
(AYT B-) Asia 8 0.89% Invest in the eight Asian currency markets.

The different products offer varying levels of risk and opportunity and offer a wide range of exposure to different currencies. Baskets invest in multiple currencies and therefore should theoretically have more price stability than a currency specific product, although this does not mean that basket currency products do not experience volatility. Sometimes these currency baskets can be very volatile if affected by a regional event or news. One type of product is no better than another, but every investor should do a thorough review of what they are looking for and the risks they can accept before deciding which product is best for them.

Forex 101

Currency markets allow global trade to run smoothly, facilitating the transfer of goods and services from one place to another. The market is also very sensitive to press releases which can change people’s opinion of a currency in the future. Interest rate and Federal Reserve announcements, as well as economic data releases, usually have the greatest impact in this regard. Below we highlight some of the major data / press releases affecting the forex market. In the moments before and after these announcements hit the market, expect increased volatility and wider bid-ask spreads in the currency ETFs you trade.

Keep in mind that the news event affecting one currency or country can affect other currencies as well, even those that don’t appear to be related. Therefore, current events such as those discussed in the next section are noteworthy when published by a major country, and the names of the releases may vary by country. Look for an economic calendar that displays all news and data reports scheduled for release in each country to stay on top of news that may affect your currency. AND F. Many of these calendars evaluate current events, from top to bottom, based on the expected impact on the market.

Main current events and impacts

newspaper photo on the keyboard

Federal Reserve or Central Bank announcements
Press releases from banking committees, financial bodies such as treasuries or reserve banks regarding interest rates or the economic outlook can change perception and are widely viewed and traded.

Consumer or product price index (CPI, IPP)
These indices provide data on inflation and therefore offer clues to the direction of interest rates, affecting the short and long term direction of currencies.

Gross domestic product (GDP)
It is an indicator of the economic condition of a country and therefore provides valuable fundamental data to forex traders.

New and existing home sales, retail sales and unemployment data
All indicators that provide data on the financial condition of consumers within a country’s economy tend to affect how a country is viewed by global and domestic traders.

Speeches by decision-makers
Discussions led by people in power, such as heads of state, federal reserves, or treasury departments, can influence markets based on their bullish or bearish comments.

Manufacturing and construction data
Examines the growth or contraction of the manufacturing sector; an indicator of economic health.

Trade balance, balance of payments, current account and debt levels
Figures that reflect economic health, growth or contraction, which have long-term effects on the supply and demand of a currency.

Forex ETF Trading Tips You Need

ETFs listed on the US markets will be active during the US session, but real currencies trade around the clock, with most activity occurring during market hours in the US and London. Since currency ETFs are sparsely traded outside of US market hours, beware of opening and closing trades (US hours) as sudden movements can occur to bring the AND F again in tune with his NAV (net asset value), or large orders may result in a significant deviation from NAV [see 7 Rules ETF Day Traders Must Know].

Currency ETFs are exposed to frequent opening price differentials, and AND F traders will not be able to capture all of the intraday movements available in the forex market around the clock. As with any trading vehicle, use stop-loss orders to control downside risk. Incorporate limit orders into your trading to try to obtain favorable prices during peak and off-peak times, and take profits using disciplined technique as currencies can be volatile and change direction quickly.

The bottom line

Currency ETFs provide a convenient way for investors to access the forex market through their current broker. Currency ETFs can be divided into two broad categories: currency specific and basket. Each offers unique advantages and disadvantages. Currencies can be volatile due to high speculation and sensitivity to news; As such, keep a close eye on global news, scheduled and unscheduled, to stay on top of short and long term events that may shape future trends. Always watch for downside risk and take profits when the potential for profit seems to be declining.

Disclosure: No position at time of writing.


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