Currency exchange-traded funds (ETFs) are an alternative investment that offer investors a way to obtain exposure to the foreign exchange market with an investment asset that trades in the same manner as common stock, on regular U.S. exchanges. Currency ETFs are fund investments designed to profit from the value or performance of a currency, such as the U.S. dollar or the euro.
Currency ETFs can be structured in different ways. The most common form is an ETF that tracks the exchange rate of a selected currency pair, such as EUR/USD, which is quoted as the U.S. dollar price exchange rate for one euro. Alternatively, some currency ETFs focus on the overall value of a given currency, reflecting its performance against a selected basket of other currencies.
Investors can utilize currency ETFs to obtain exposure to investments in the forex market, to gain further diversification in their investment portfolio or to hedge other investments in their portfolio. The euro is the second most frequently traded currency, behind the U.S. dollar.
The CurrencyShares Euro Trust ETF
The CurrencyShares Euro Trust ETF (NYSEArca: FXE) is designed to provide investors with exposure to potential profits from an appreciation in value of the euro in direct relation to the value of the U.S. dollar. Shares in the trust represent units of fractional interest in ownership of the trust, which is invested in the EUR/USD exchange rate. Trust shares increase or decrease in value in correlation to increases or decreases in the exchange rate between the euro and the U.S. dollar.
This fund from RydexSGI, rated as medium risk, shows five-year returns of -18.5% as of June 2015, resulting from a sustained uptrend in the relative value of the U.S. dollar. The expense ratio for the fund is relatively low, at 0.4%. There is no dividend yield offered by investment in the fund, since it does not have stock holdings. This is one of the most widely traded euro-focused ETFs, with total assets of approximately $300 million and an average daily trading volume of almost 1 million shares.
The iPath EUR/USD Exchange Rate ETN
This exchange-traded note (ETN), issued by Barclays Bank, is similar to other single-currency iPath ETNs. The iPath EUR/USD Exchange Rate ETN (NYSEArca: ERO) is appropriate for investors wishing to invest in the euro – particularly for investors who prefer trading ETNs, which are debt securities, as opposed to traditional ETFs. The ETN reflects the performance of a benchmark index that measures the relative values of the euro and the U.S. dollar. The index also includes the value of returns using U.S. Treasury bills for cash collateral. Share values of ERO increase or decrease in correlation to the relative value of the euro.
ERO is rated as a relatively moderate ETN. The total assets of the trust are approximately $3 million, so ERO trades with less liquidity than FXE. The expense ratio for ERO is 0.4%.
The ProShares Ultra Short Euro ETF
This leveraged ETF is ideally suited for investors who anticipate a decline in the value of the euro relative to the U.S. dollar (as it sells short the EUR/USD currency pair) and who wish to use leveraged investments. The ProShares Ultra Short Euro ETF (NYSEArca: EUO) aims for daily investment results that reflect 200% of the inverse of the daily change in the EUR/USD exchange rate, excluding expenses. The fund prospers as the EUR/USD exchange rate falls. The fund shows a five-year return of 26%.
Because of the leveraged nature of the investment, it is rated as relatively high-risk. The fund carries an expense ratio of 0.95%. It is the largest EUR/USD ETF, with assets in excess of $600 million.
