March 14, 2011

Trading Forex Using A Currency ETF (Exchange Traded Fund)

Most people who trade the forex markets do so through one of the many different forex brokers that are available. However if you are interested in taking a long term view on a particular currency pair, you do have another cost-effective option and that's to buy the corresponding currency ETF (exchange traded fund).

If you don't already know what an exchange traded fund is, it is basically just a vehicle that tracks a certain instrument (or group of instruments). So for example a crude oil ETF will move in accordance with the underlying crude oil price and a wheat ETF will move broadly in line with the price of wheat.

You can find exchange traded funds for pretty much anything these days including stocks, bonds, futures and commodities. Plus you can of course find plenty of currency ETFs that track various different currency pairs, which is obviously the focus of this article.

These instruments can be bought and sold like ordinary stocks so you don't need to use a forex broker at all. You can simply log in to your share dealing account and trade them as part of your overall investment portfolio.

So for example if you think the GBP/USD pair is set to move a lot higher in the coming months and years, then you may wish to buy a GBP/USD ETF and treat it as a long term investment. Similarly if you are bearish about the British pound against the US dollar you could buy the corresponding USD/GBP ETF or you could buy a short ETF for the GBP/USD if this is available in your country.

You have lots of options. You can even buy leveraged instruments if you so wish. These work by giving you 2x your overall gains. So if the GBP/USD were to go up by 10%, for example, you would make approximately 20% instead of 10%. However they are of course very risky because you can also lose big amounts of money as well, and overall I would say that they are more ideally suited to short term traders rather than long term traders because of the costs involved.

Anyway the point I want to make is that if you think a particular currency pair is undervalued, or you are confident that a specific currency is really going to strengthen in the long run, then you might like to consider buying currency ETFs for your investment portfolio. They can be bought and sold really easily and they are great for anyone looking to take a long term view on a particular forex pair.

 

 

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