A Look at the Currency ETF

A currency ETF provides an investor the chance to invest in foreign currency without some of the complications that typically come with this type of leveraged investment. Foreign currency investment is extremely complicated because of many options and futures possibilities on the purchase or sale of currency. Most novice to intermediate investors cannot successfully execute foreign currency trade. A currency ETF, or exchange traded fund, takes care of most of the calculations for you.

What Makes a Currency ETF?

A typical ETF is an index of multiple investments, bundled into one investment. The ETF trades at the value of the sum of its parts. With a currency ETF, the parts are all foreign or domestic currency. Most currency ETFs focus on just one type of currency, like the Yen, pound or Euro. Currency ETFs are bundled by investment companies to reflect the price changes in a given currency. Unlike foreign currency trading, ETFs do not attempt to out earn the currency itself. So, for example, if you think the Euro will experience growth in the next 5 years, you can purchase a Euro ETF and expect the ETF to grow at a similar rate as the Euro itself. This is a simplified example because some research is involved in determining which currencies will grow over time, but it is essentially the way the currency ETF operates.

Who Can purchase a Currency ETF?

ETFs, as a rule, are not open to all investors. Because of their complexity, most ETFs are only open to those investors at an institutional level. Institutional investors are mutual funds, hedge funds and investment groups. Individual investors with a sizable amount of cash in the market, over $100M, can be considered institutional investors. If a retail customer would like to purchase an ETF, he or she can approach an investment organization to do so. The person can then access the ETF through the institutional investment company.

When Should I Use a Currency ETF?

Currency ETF options are a great way to get started investing in foreign currency. Before choosing to get involved, it is best to track the indexes of currencies for some time. You can take a look at those ETFs that have high rates of return and high risks. You will also see that some ETFs have more modest rates and less risk. Keep in mind: there are many tax implications to earning an income off of investments. One of the main advantages of ETFs, though, is there is no capital gains tax on an annual or quarterly basis. Instead, you are only taxed on the earnings when you decide to sell the ETF. This can be extremely beneficial for investors who do not have the liquidity to pay taxes on earnings they have not yet realized in their pockets. Investors going back to school, paying for a child's education or even having a baby may find this to be a huge relief in the short run. Of course, the overall taxable income is the same, but the schedule of taxes can be less burdensome with an ETF.

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