Earning profits by investing in types of money, whether domestic or foreign currency, can be done to add stability to an investment portfolio or in hopes of generating profits. Investors can choose different types of currency funds, including mutual funds or Exchange-Traded Funds (ETFs). Within those two investment vehicles, there are different compositions of currency funds, including some that provide exposure to a single, risky currency and others that invest across a basket of different regional currencies.
Currency mutual funds can be designed to take advantage of different opportunities across global economies. The strategy behind currency funds in the mutual fund space should be outlined in a prospectus, which is a regulatory filing with a regional governing body, such as the Securities and Exchange Commission in the U.S., and made available to the public. Different investment strategies can be applied.
A currency mutual fund might focus on investing in currencies that operate in regional economies where there is low inflation, for instance. The investment strategy might be to take advantage of likely growth in that economy over a domestic currency. In order for the strategy to work, considerations must be made that can influence the value of a currency, such as political events or the price of oil in oil-rich nations.
Benefits of a currency mutual fund include the fact that investment decisions are made by professional investment managers. Individual investors might have more flexibility in selecting ETF currency funds but cannot lean on the expertise of professionals and instead must make buy and sell decisions alone for the most part. ETF investing can be less expensive than mutual fund investing.
ETF currency funds are indexes that are designed to track the performance of a single regional currency or multiple currencies. Before the emergence of ETFs, currency investing was largely limited to institutional investors because of the hefty investment requirements enforced by major exchanges where currencies trade, such as the CME Group in the U.S. An ETF trades like a stock, and as a result, the average investor can gain access to foreign currency exposure by purchasing shares of this index currency fund.
When investing abroad, investors don't actually buy the foreign currency, but the interest rate paid on the investment is based on the foreign country's currency. Primarily, currency ETFs purchase currency futures contracts. These contracts allow market participants to purchase or sell a currency at a predetermined price at a future date. Futures contracts are transferable, and investors can trade currency contracts prior to their expiration dates.