Learn all about currency ETPs, and whether you should invest in them.
Currency ETPs explained
Currency ETPs are a form of exchange traded product (ETP) that allows you to go long or short on the price of a given currency pair. Say, for example, that you wanted to take a long position on EUR/USD. You could use a currency ETP to take that position.
They share many similarities with ETFs: they’re listed on exchanges, traded daily and have multiple market makers. But since they are not strictly designated as funds, they are not ETFs and are mostly structured as exchange traded notes (ETNs).
What are the advantages of currency ETPs?
There are several key benefits to using currency ETPs. Firstly, they are traded on exchanges – which means that they are easy to buy and sell, transparent and comparatively cost efficient.
They can also be a good alternative for traders who wish to trade with lower levels of leverage. You don’t usually need to manage a margin account to trade currency ETPs, which you may have to do when trading currencies directly.
However, when investing in a currency ETP is important to ensure that you understand how the underlying index – in this case a currency pair – works and what the payoff profile looks like.
What is the size of the currency ETP market?
In Europe, the currency ETP market has a value of around $400-$500 million. In the US it is worth billions. It’s growing on both sides of the pond, though, with more issuers coming into the marketplace.
Currencies have really come to the fore in recent years. Key volatility events, like Brexit, and ongoing debates over central banks’ monetary policies are ensuring that currency prices are of real concern to investors. Currency ETPs offer an interesting alternative way of getting involved without trading futures, forwards or options. That should be good news for the currency ETP market’s continued growth.
How can currency ETPs fit your investment strategy?
Currency ETPs can complement your existing strategy in a wide variety of ways.
- They can offer extra diversity to you portfolio
- They can be used in tactical momentum trades, if you are looking at an opportunity like an event that you believe will cause movement
- They can be held for longer periods of time, if you are aiming for a longer term currency investment strategy
Popular currency ETPs
Here are some of the most-traded currency ETPs on the IG platform:
- ETFS 3x Long USD Short GBP, provided by ETF Securities
- ETFS 3x Short EUR Long USD, ETF Securities
- ETFS Long EUR Short USD - EURP, ETF Securities
- ETFS Short EUR Long GBP, ETF Securities
- ETFS 3x Long JPY Short USD, ETF Securities
Data from IG, March 2017