A currency ETF is an exchange-traded fund (ETF) that is designed to provide investors with exposure to a single currency or a basket of currency. The financial resources of the funds are pooled to provide exposure to the underlying currency (currencies) by tracking its (their) performance against a certain currency or a basket of currencies.
In its simplest form, an ETF might be backed by bank deposits in a foreign currency. Other more complex currency ETFs involve purchase of currency derivatives (particularly, currency forwards and currency swaps, which give the buyer the right to exchange a certain currency at a predetermined date) to establish foreign currency exposure.
For selection of a currency ETF, multiple factors, that impact the value of currencies used, need to be considered, including:
- Interest rates.
- Central bank measures and intervention in the foreign exchange market.
- Dynamics of international trade (currency supply and demand).
- Catastrophes and natural disasters.
- Economic events.
- Political developments.
- Wars and global conflicts.
In general, any event or development that could potentially impact foreign exchange rates need to be considered.
