Low management fees: Because most aren’t actively managed, the management fees tend to be somewhat low.Lower transaction fees: Investors can gain ongoing exposure to the forex market without having to pay the transaction fees involved in buying and selling currencies.Trades on the market: Unlike foreign currencies, investors can buy currency ETFs through their existing brokerage account and without having to make individual currency or derivative trades.Make speculative currency trades: can allow investors to speculate on currency valuations by pairing them against other currencies or a basket of currencies.Portfolio diversity: Currency ETFs can add to a portfolio’s currency diversity or can be used as a hedging strategy against the relative value of a particular currency.Risks associated with currency linked ETFs, especially leveraged and inverse ETFs, includes volatile markets, rapidly fluctuating exchange rates, and the high cost of hedging. Currency hedged equity funds use forward contracts to hedge out local currency exposure, essentially allowing them to own the underlying equity in USD terms. Alternatively, an investor could have invested in a currency hedged equity fund, DXJ. BLOOMBERG CROSS CURRENCY RATES FULLIf an investor would have shorted FXY in an appropriate amount to hedge yen currency risks, they would have realized the full return of the local index. The difference was the value of the yen, which had deteriorated by an equal amount. While a respectable return for the ETF, naturally an investor would like the return of the index more. For example, in 2013 the Nikkei 225 Index in Japan gained nearly 59%, whereas Japan ETF EWJ gained 27%. Why are currency linked ETFs important? In the first place they’re necessary for hedging purposes. Today, currency ETFs track most global currencies. Currency ETFs are designed to track the performance of a single currency in the foreign exchange market against the US dollar or a basket of currencies.
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