Thursday, January 20, 2011

Currency ETFs, a great alternative to Forex trading.

If you have been trading the Forex markets for awhile but are tired of the high risk and volatility that comes with it, currency ETFs are a great alternative. Picture your favorite currency pair trading like a stock!
What is a currency ETF?
An ETF short for Exchange Traded Fund, is like a fund or holding that trades like a stock (has a ticker symbol for buying and selling) and tracks a certain sector of an industry, commodity, or in the case of this post subject, a currency. (It's like a mutual fund, but cheaper).
For example, the FXE (Currency Shares Euro Trust) ETF tracks the performance of the Euro weighted against the US Dollar. Since it trades like a stock it also comes with the benefit of an option chain. There are dozens of currency ETFs out there, some currency ETFs are bearish ETFs some are bullish, it all depends on which which direction you think the market is heading, I'm just going to stick with some major ETFs in this post.

There are some downsides of trading currency ETFs compared to actually trading Forex.
For one, there are a limited amount of choices you can make when it comes to which pairs you trade, but if you're like me and only stick with trading the majors you won't find this so much of a downside. Second,  there is a leverage limit, in other words you can't make a whole lot of money at once like you can do in the Forex markets (but think risk management! Less leverage, less risk)
Also some ETF funds might charge an annual fee.
The bottom line is that currency ETFs are a great alternative to Forex, number one being less risky and you can still be trading in the world of currencies.

For the Forex traders among us, take a look at the following chart that should look really familiar if you trade the EUR/USD;

Now, let's take a look at the FXE, The ETF that tracks the Euro;

See the similarities? So it tracks the Euro, with it's own 'stock' price (also very similar to the EUR/USD pair).
Check out the list for more major ETFs;

  • FXA CurrencyShares Australian Dollar Trust
  • FXB CurrencyShares British Pound Sterling Trust
  • FXC CurrencyShares Canadian Dollar Trust
  • FXE CurrencyShares Euro Trust
  • FXF CurrencyShares Swiss Franc
  • FXY CurrencyShares Japanese Yen Trust
  • FXM CurrencyShares Mexican Peso Trust
  • XRU CurrencyShares Russian Ruble Trust
  • FXS CurrencyShares Swedish Krona Trust
  • FXF CurrencyShares Swiss Franc Trust
  • BZF WisdomTree Dreyfus Brazilian Real Fund
  • CYB WisdomTree Dreyfus Chinese Yuan Fund
  • CEW WisdomTree Dreyfus Emerging Currency Fund – Active
  • EU WisdomTree Dreyfus Euro Fund
  • ICN WisdomTree Dreyfus Indian Rupee Fund
  • JYF WisdomTree Dreyfus Japanese Yen Fund
  • BNZ WisdomTree Dreyfus New Zealand Dollar Fund
  • SZR WisdomTree Dreyfus South African Rand Fund

Leveraged Currency ETFs – Long and Short;
  • ULE ProShares Ultra Euro ETF
  • YCL ProShares Ultra Yen ETF
  • EUO ProShares UltraShort Euro ETF
  • YCS ProShares UltraShort Yen ETF
Check out to see which pair you usually trade in Forex and match it up with the corresponding ETF. (remember, all ETFs listed above are weighted against the USD)

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All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.