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Currency ETF refers to pooled investment vehicles consisting of foreign currency assets that are traded like shares on the stock exchange. These securities aim to mirror the exchange rate movement of a foreign currency or a set of currencies compared to the Indian currency. The currency ETF can be a viable investment option. In this article, we will look at what a currency ETF is and how it works.
What is a currency ETF in India?
A currency ETF involves investing in foreign exchange and currencies. The ETF or Exchange Traded Funds can be bought and sold on the securities exchange market with either one currency or a basket of currencies as the underlying asset.
Currency ETFs allow investors to diversify their investment portfolio and gain exposure to foreign currencies. Profits on currency ETFs occur when currency prices fluctuate.
The currency ETF list includes Grayscale Bitcoin Trust, IShares Bitcoin Trust Registered, Fidelity Wise Origin Bitcoin Fund, ProShares Bitcoin Strategy ETF, Bitwise Bitcoin ETF Trust, VanEck Bitcoin Trust, etc.
How does currency ETF work?
While earlier only selected people could trade in foreign currencies, it has now become simpler with currency ETFs. They are widely available funds that provide investors with a structured investment opportunity and let them trade at low costs during normal trading hours.
Currency ETFs invest in foreign exchange derivative contracts, currency deposits, cash, and short-term debt in currency denominations.
The currency ETF can be bought and sold through brokers or on the platform directly. The fluctuations in the currency prices realize the profits in the currency ETF exchanges.
Advantages of currency ETF
With an understanding of what currency ETFs in India are, let us now look at their distinct advantages. These include:
- Exposure to foreign markets: The primary advantage of currency ETFs is that they provide exposure to foreign markets without the need to open a forex account or deal with complicated forex transaction procedures.
- Benefit from currency fluctuations: The currency ETF is a fund that lets investors benefit from the frequent currency fluctuations of a foreign currency or a basket of currencies compared to the Indian rupee.
- Liquidity and transparency: Another advantage of this investment is that it is liquid and transparent as it is traded on the stock exchange like all other investment instruments. The currency ETFs are also updated in real-time to maximize transparency.
- Low barriers: ETFs have low barriers when entering and exiting the security, as investors can buy even a small quantity. Additionally, the expense ratio of the ETF currency is low.
- Hedging possibility: The currency ETF can also be utilised for hedging purposes. They can help minimize risks associated with international investments and business transactions.
Disadvantages of currency ETF
With several advantages, let us consider the disadvantages before investing in currency ETFs. These include:
- High volatility: The primary concern with currency ETFs is their high volatility and uncertainty, as they depend on market currency fluctuations. These fluctuations can be influenced by political, economic, and social factors, making currency ETFs highly volatile.
- Additional costs: The currency ETFs might only sometimes meet their benchmarks as several costs and restrictions are involved. These include transaction fees, regulatory limits, fund management fees, and market inefficiencies.
- Low trading volume: Another downside of currency ETFs is their relatively new investment opportunities and niche funds. Investors might be reluctant to invest in them, leading to low trading volume and liquidity.
- Tax considerations: Lastly, before investing in these securities, it is crucial to understand their tax implications. These securities might be imposed with short-term and long-term capital gains tax, depending on the holding period.
Who should invest in a currency ETF?
The currency ETFs are ideal for investors looking to enter the foreign securities market with minimal costs and effort. It is a viable investment opportunity to invest in a fund instead of individual securities and gain currency exposure at a low cost. These securities are also suited for individuals looking for a hedging option or mitigating their currency risks.
However, evaluating the risks of investing in a currency ETF and the costs attached to it is integral. Carefully consider your goals and risk appetite before investing in the currency ETF.
Conclusion
Leveraged currency ETFs to minimise your risks for foreign currency investments and get a safe and balanced fund investment. It is an innovative investment option for diversifying their investment portfolio and entering the forex market without much hassle. However, carefully evaluate the pros and cons of investing in currency ETFs and study the performance of currency ETF symbols to determine whether they suit your goals. To learn more, subscribe to StockGro.
FAQs
Currency ETFs are investments in foreign exchange and securities that can be bought and sold on the stock market or through a broker.
The key advantages of investing in a currency ETF include exposure to foreign markets benefit from price fluctuations, high volatility and transparency, low expense ratios, and hedging opportunities.
The disadvantages of currency ETFs include high volatility, additional costs, low trading volume, and tax considerations.
Yes, depending on the holding period of the investment, short-term and long-term capital gain taxes are applied to the currency ETF.
Currency ETF is a good opportunity for people looking to diversify their portfolio with foreign investments in a structured way or mitigate risks from foreign currency price fluctuations.