We take a look at the best currency exchange-traded funds (ETFs) to invest in. But first, some criteria need to be established on what makes an ETF “the best.” Two important criteria are volume and tracking accuracy. Volume allows you to enter and exit trades of varying size easily and quickly. The currency ETF should also accurately track the currency it is meant to represent. If it doesn't, then you aren't buying/selling what you think you are.
Best Currency ETFs
- The most widely-traded currency ETF is the PowerShares DB US Dollar Bullish ETF (UUP). Average volume is over two million shares and the ETF is meant to simulate being long the U.S. dollar index futures, which is the U.S. dollar versus the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The fund market price may deviate several percent from the U.S. dollar index benchmark during times of volatility, but often the return on UUP is within 1% of what could be attained if holding a continuous futures contract in the U.S. dollar index. The fund has a 0.8% expense ratio.
- The CurrencyShares Euro Currency Trust (FXE) is the best ETF for trading the euro. It has daily a volume of 740,000 shares and an expense ratio of 0.4%, and it does a very good job of tracking the euro versus the U.S. dollar. There are only minor deviations between the trust performance and that of the EUR/USD currency pair which the fund tracks.
Figure 1. FXE vs. EUR/USD (Pink) Daily Chart - Percentage Scale
- For trading the Japanese yen, the best currency ETF is the CurrencyShares Japanese Yen Trust (FXY). It has a low tracking error (similar to Figure 1) and a 0.4% expense ratio, and it trades approximately 114,000 shares a day on average. The fund tracks the JPY/USD exchange rate.
- For trading the Canadian dollar, the CurrencyShares Canadian Dollar Trust (FXC) is the best option. It trades approximately 61,000 shares per day and has a 0.4% expense ratio. FXC tracks the CAD/USD exchange rate, and does it well.
- The Dreyfus Chinese Yuan Fund (CYB) is one of the few ways for retail traders to access the Chinese currency. The expense ratio is 0.45% and the fund is relatively liquid trading, approximately 61,000 shares per day. The fund is intended to track the CNY/USD, as well as money market returns in China. It is actively traded, so it doesn't specifically track one benchmark. Between June 30, 2015 and the fund's inception in 2008, CYB has performed as well, or outperformed (due to the additional income from money market returns), the Chinese yuan.
- CurrencyShares Australian Dollar Trust (FXA) tracks the AUD/USD well, with only minor discrepancies. Its average volume is 51,000 shares and its expense ratio is 0.4%.
- The best ETF for the trading the British pound is the CurrencyShares British Pound Sterling Trust (FXB). It has a 0.4% expense ratio and typically trades 21,000 shares per day. Ideally, volume should be higher than this, as it may be difficult to accumulate or dispose of a large position. Tracking errors are minimal between FXB and the GBP/USD that it tracks.
- CurrencyShares Swiss Franc Trust (FXF) is a best ETF for trading the Swiss franc, but it too has lower volume. It typically trades 16,000 shares per day, making larger positions harder to accumulate or exit. The expense ratio is 0.40%. Tracking errors are minimal between FXF and the CHF/USD currency pair.
The table shows summary statistics (as of September 2015) for the best currency ETFs.
| Currency ETF | Avg. Volume | Expense Ratio | Tracks: |
| DB US Dollar Bullish ETF (UUP) | 2.3 million | 0.8% | US Dollar Index Futures |
| Euro Currency Trust (FXE) | 740,000 | 0.4% | EUR/USD |
| Japanese Yen Trust (FXY) | 114,000 | 0.4% | JPY/USD |
| Canadian Dollar Trust (FXC) | 61,000 | 0.4% | CAD/USD |
| Chinese Yuan Fund (CYB) | 61,000 | 0.45% | CNY/USD, plus China money market returns |
| Australian Dollar Trust (FXA) | 51,000 | 0.4% | AUD/USD |
| British Pound Sterling Trust (FXB) | 21,000 | 0.4% | GBP/USD |
| Swiss Franc Trust (FXF) | 16,000 | 0.4% | CHF/USD |
The Bottom Line
While there are many currency ETFs, these are the best at tracking the underlying currency, as well as providing volume to trade. The more volume the better for entering and exiting positions. This is where FXB and FXF fall a bit short, yet they are the best available ETFs for trading these two popular currencies. Before trading an ETF, read the prospectus so you know the investment objectives and risks.
