By Drew Corbett, BetaShares. Basically, an ETF is an investment vehicle built like a managed fund but which trades like a share, meaning units can be bought and sold throughout the trading day. ETFs aim to track the performance of a specific index or asset and are designed to be price transparent, liquid and cost-efficient investment tools for investors. Investors may be familiar with equity ETFs, but in three currency ETFs were listed, which for the first time have given investors access to the currency markets through a simple structure, enabling them to buy and sell currency exposure on ASX through regular broking accounts.
However, before the launch of currency ETFs, many Australian retail investors found it either too difficult or too costly to access the FX market. They could only access it by opening a foreign currency bank account which, because of poor exchange rates offered by banks, could be quite expensive, or by using an FX platform involving leverage and potential margin calls.
Currency ETFs work simply and cost-efficiently to track the change in value of the foreign currency relative to the Australian dollar, before fees and expenses. The assets of the ETF are invested in bank deposit accounts denominated in the relevant foreign currency.
Any interest earned on the deposits accrues to the benefit of the ETF and is distributed to the investor if interest exceeds the fees and expenses of the ETF. This simple structure provides investors with access to direct foreign currency performance and, because the ETF issuer is able to access wholesale exchange rates, retail investors obtain rates otherwise only available to the largest institutional investors.
POU - relative to the Australian dollar. Comparison of currency ETFs to alternative ways to obtain foreign exchange exposure. It can be seen that ETFs have advantages over other methods of FX exposure for many retail investors: Currency ETFs provide the advantages of low cost and simplicity. As mentioned, they can be bought and sold like any share on ASX. The fees associated with these ETFs include the small annual management fee of 0. The existing currency ETFs listed on ASX rise in value when the Australian dollar falls against the currency it is tracking, and vice versa.
Investors interested in profiting from a view that the Australian dollar will rise in value relative to a foreign currency need to discuss shorting the ETF with their broker. Most of the popular foreign currency trading platforms offer leveraged exposure. The existence of leverage using debt creates the possibility of margin calls and are typically appropriate for only sophisticated foreign currency traders.
ETFs, on the other hand, are not leveraged, providing flexibility to take short-term views as well as medium and long-term positions.
For most investors, this would make them an attractive alternative to currency trading platforms accounts. Investors should be aware that currency ETFs are not meant to compete with foreign currency platforms. ETFs may not be the most appropriate vehicle for FX traders looking to profit from minor movements in exchange rates. But for other investors, ETFs are a simple, transparent tool designed to accurately track the Australian dollar against another currency.
This strategy can be used when an investor believes the Australian dollar will weaken against a specific currency. With the Australian dollar trading well above the long-term average against the US dollar, euro and British pound, currency ETFs may represent an opportunity for medium to long-term investors. If they believe mean reversion movement back to the historical average will occur, then an ETF provides an efficient way to back that view. Do not read this as a recommendation that the Australian dollar will fall.
Currency movements can be difficult to forecast. Do further research of your own or talk to your financial adviser before acting on themes in this article. Currencies can be used to reduce the volatility of an investment portfolio, so the addition of currency ETFs to an investor's portfolio can diversify overall returns. Past performance is not an indication of future performance. Many Australian investors are heavily exposed to the resources industry, either through direct equities holdings or managed funds.
Past performance is not an indicator of future performance. Drew Corbett is head of investment strategy at BetaShares. He is a pioneer in the global exchange-traded funds sector and has more than 25 years financial sector experience throughout Australia, Asia, Europe and the United States. Use exchange traded funds to capitalise on foreign exchange movements.
Alternatives to currency ETFs The table below compares the alternatives of accessing the foreign exchange market: Profiting from a falling Australian dollar The existing currency ETFs listed on ASX rise in value when the Australian dollar falls against the currency it is tracking, and vice versa.
Profiting from a bearish view on the Australian dollar This strategy can be used when an investor believes the Australian dollar will weaken against a specific currency.
Diversifying a portfolio Currencies can be used to reduce the volatility of an investment portfolio, so the addition of currency ETFs to an investor's portfolio can diversify overall returns. Past performance is not an indication of future performance 3.
Portfolio protection Many Australian investors are heavily exposed to the resources industry, either through direct equities holdings or managed funds. About the author Drew Corbett is head of investment strategy at BetaShares.
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 and its related bodies corporate "ASX". ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content.
The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
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