Currency ETF
A currency ETF is an built to track the value of a foreign currency, or a basket of currencies, relative to the US dollar. It gives investors a way to take a position on currency movements through a normal , without opening a separate foreign exchange or holding foreign bank deposits directly.
Most currency ETFs achieve their exposure either by holding actual foreign currency deposits and short-term instruments denominated in that currency, or by using currency and forward contracts to replicate the currency's return. A currency ETF tracking the euro, for example, is designed to rise when the euro strengthens against the dollar and fall when it weakens, moving in step with the exchange rate rather than with any or market.
Investors use currency ETFs for a few different purposes, including speculating on currency moves directly, foreign currency exposure elsewhere in a , or diversifying away from dollar denominated . Because currencies do not generate or interest the way or do, currency ETF returns come almost entirely from exchange rate movements and any interest earned on the underlying currency deposits, which tends to make them more relative to their underlying growth driver than most investors expect.