Investing in currency with ETFs

Investing in currency exposure is flexible and convenient with ETFs.

Currency ETFs aim to track the change in price of foreign currency relative to the Australia dollar, before expenses and fees.

For example, the USD U.S. Dollar ETF aims to track the change in value of the U.S. dollar ($US) relative to the Australian dollar ($A), (before fees and expenses). So, if the US$ goes up 10% against the A$ (i.e. the A$ falls in value), the ETF is designed to go up in value by 10% too (before fees and expenses). Conversely, the ETF can be expected to go down in value if the $US falls relative to the $A.

Before currency ETFs were available, investing in currency was generally difficult for Australian investors because of the barriers to access the foreign exchange (FX) market to trade foreign currency.

An ETF provides investors with a more convenient and cost-effective way to gain exposure to foreign currency performance at rates that would otherwise only be available to the largest wholesale investors.

Currency ETFs can be bought and sold on the ASX during trading hours like shares, without the need to use complicated foreign currency trading platforms, trade CFDs or to open a foreign currency bank account.

Costs of investing in a currency ETF typically include a low management fee, as well as potential transaction costs and brokerage (just like when you trade any share on the ASX). For most investors, this will be much cheaper than alternative ways to get exposure to a foreign currency, such as using as a foreign bank account.

Currency ETFs may provide exposure to the performance of a foreign currency by investing in cash/currency deposits, foreign exchange derivative contracts or short-term debt denominated in a currency.

In the case of Betashares currency ETFs, the assets of each 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 will be distributed to investors (if such interest exceeds the fees and expenses of the ETF).

Betashares currency ETF deposit accounts are primarily held with JP Morgan Chase Bank.

The value of foreign currency has tended to fluctuate widely over the past several years relative to the Australian dollar.

Currency movements are influenced by economic, macro and political events.

Interest rates from central banks, slow global economic conditions or an unstable political environment are amongst the factors that would influence exchange rates.

There are other risks that apply. Investors should refer to the relevant ETF’s product disclosure statement for further information.

Currency ETFs can be used to implement a number of different investing strategies:

1. Seek to profit if the Australian dollar falls in value against a foreign currency

2. Hedge against currency risk

Individual investors or businesses that are exposed to foreign currency risk can use currency ETFs to hedge against fluctuations in foreign currency exchange rates.

3. Diversify a portfolio

Currencies historically have shown a low correlation to equities, fixed income and most other asset classes, so could offer diversification benefits by helping to reduce the volatility of an investment portfolio.

Read more about how to diversify your portfolio here.

4. To seek to buffer an investor’s exposure to resources

Many Australian investors are naturally heavily exposed to the resources industry, either through direct shareholdings or the holdings of their managed funds.

Historically, the USD/AUD exchange rate has tended to move inversely with the resources index¹, so an investment in the USD U.S. Dollar ETF could potentially act as a hedge against existing resources exposures in investor portfolios.

¹ Past performance is not indicative of future performance.