What Are Currency ETFs?

Currency ETFs offer investors exposure to currencies without buying or selling them directly. They can help investors benefit from changes in currency prices or reduce the risk of changes in exchange rates.

Let's understand in detail what currency ETFs are, their types, why investors use them, and how Indians can invest in them.

What Are Currency ETFs?

A currency ETF (Exchange-Traded Fund) is a pooled investment that tracks the performance of one or more currencies in the foreign exchange market. It allows investors to gain exposure to fluctuating exchange rates without trading individual currency pairs directly.

Currency ETFs are generally designed to follow a single currency or a currency basket. These passive funds let you hedge or speculate on forex movements straight from a standard brokerage account.

Types Of Currency ETFs

The following are the main types of currency ETFs.

Single-Currency ETFs

Single-Currency ETFs are a type of exchange-traded fund that moves in line with one foreign currency relative to another currency, which is usually the US dollar. Investors who wish to profit from the variations in one currency’s price can look at this investment.

Basket Currency ETFs

Basket Currency ETFs invest in more than one currency rather than just a single currency. This type of ETF enables investors to spread their exposure across multiple currencies, rather than relying on just one currency.

Leveraged and Inverse Currency ETFs

Leveraged and Inverse Currency ETFs use financial tools called derivatives to increase their exposure to currency movements or benefit when a currency's value falls. Leveraged and inverse currency ETFs can carry high risks and are generally designed for short-term trading.

Currency-Hedged Equity ETFs

Currency-Hedged Equity ETFs invest in shares of companies in foreign markets and use currency hedging to reduce the impact of exchange-rate changes. They allow investors to focus more on stock market performance, although hedging may not remove all currency risk.

Can Indians Invest and Trade in Currency ETFs?

Under RBI and government regulations, Indian residents may invest in eligible foreign securities, including certain overseas ETFs, through permitted routes. However, eligibility depends on the investment product and the applicable regulatory requirements.

Some of the routes of investing in currency ETFs are as follows:

LRS Route

One option available to Indian citizens, who are resident in India, is to set up an international brokerage account and invest through the Liberalised Remittance Scheme (LRS), which allows sending money for permitted overseas investments, subject to the applicable limits and regulations.

Investing Via GIFT City (IFSC)

The IFSC (International Financial Services Centre) located at GIFT City in Gujarat can be used by Indian investors to get exposure to various international investment products offered by authorised financial entities authorised to operate in the IFSC.

Other Ways to Invest in Currency

Indian exchanges have various currency derivatives available to investors, which include the trading of currencies using the listed currency pairs and making transactions through a broker registered to undertake the relevant transactions according to the respective exchange regulations.

FAQs

What is a currency ETF?

A currency ETF is a pooled investment vehicle that tracks the value of one or more currencies. It lets investors gain exposure to currency movements without trading currencies directly.

What are the main types of currency ETFs?

The main types of currency ETFs are single-currency ETFs, basket currency ETFs, leveraged and inverse currency ETFs, and currency-hedged equity ETFs.

Why do investors invest in currency ETFs?

Investors invest in currency ETFs to benefit from changes in currency prices, spread their investments across currencies, or reduce the risk of exchange-rate changes.

Can Indians invest in currency ETFs?

Yes, Indian investors may invest in eligible foreign currency ETFs through permitted routes, such as the LRS and eligible GIFT City (IFSC) platforms, subject to applicable rules.

Are currency ETFs risky?

Yes, currency ETFs can lose value due to changes in exchange rates and market conditions.