What Is a Yen ETF?

Investing in foreign or international currency can be a major endeavor for the average retail investor. Large upfront investments are often required to make a trade in the financial markets worthwhile for the broker or person executing the trade on behalf of investors. A yen exchange-traded fund (ETF) makes the process more accessible to all investors. It is an index fund designed similarly to a mutual fund, but it can be bought and sold throughout the course of a trading day like a stock. It is comprised of the Japanese currency, the yen, in addition to other more complex securities tied to the yen, including options and futures contracts.

A yen ETF trades based on the value of the Japanese yen in comparison with the value of the currency in another nation, such as the US Dollar. It tracks or performs alongside an established market index and is made up similarly to that index. The stronger the value of the yen, the higher the currency index fund will trade. These investments become especially attractive when the value of a local currency is demonstrating weakness and the prospects for an international currency such as the yen are solid.

The stronger the Japanese currency becomes, the better a yen ETF performs. Even when the country is in crisis in the wake of a major economic, social or structural emergency, the yen has been historically strong. This is because, for the nation to recover from any setback, corporations and investors are willing to invest local currency in the rebuilding process, thus strengthening the value and the anticipated value of the yen and driving a yen ETF higher.

An investor can invest in a yen ETF via a financial services firm, such as an online broker or an asset management company. Financial firms extend services to include currency ETFs as a way to provide diversification to clients who are looking to invest beyond stocks and bonds, for instance. Many of these firms educate investors who have never before invested in the currency markets to expect volatility — extreme swings to both the upside and the downside — in a currency-based ETF. This is in part because the value of a nation's currency is influenced by broader factors such as interest rates in a region, inflation and the possibility of intervention by a government or treasury to maintain some control of a country's economic system in an attempt to avoid a major negative event, such as a recession.