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The ABCs of Currency ETFs

This past June, Rockville, Md.-based Rydex added six more currency-based exchange-traded funds to the market when it launched the CurrencyShares series of funds on the New York Stock Exchange. These ETFs -- the CurrencyShares Australian Dollar (NYSE: FXA  ) , British Pound Sterling (NYSE: FXB  ) , Canadian Dollar (NYSE: FXC  ) , Mexican Peso (NYSE: FXM  ) , Swedish Krona (NYSE: FXS  ) , and Swiss Franc (NYSE: FXF  ) funds -- were created to track the price movements of world currencies.

These new creations follow the first-ever currency ETF, the Euro Currency Trust (NYSE: FXE  ) , which Rydex launched at the end of 2005. It was designed to rise in value when the euro strengthens relative to the U.S. dollar and fall when the euro weakens. These new ETFs work on the same principle.

That means that even though these are currency funds, don't expect any cash income from them. That's not their objective. If you sell your shares after a fund's currency strengthens relative to the U.S. dollar, you'll have a gain. There have been times when I've watched the dollar go down in value and wanted to benefit from that trend. With these new funds, investors can implement a strategy to do just that. But remember that you'll have to deal with swings in value in the capricious currency markets.

Strangely, Rydex seems to have had no yen for a Japanese currency fund. That's too bad, since a Japanese yen fund would have rounded out the major currencies.

Giant institutional investors, such as banks and brokerages, have traditionally dominated the currency markets. Now individual investors can play in this market, too. Just be wary of the risks that come with it.

To learn all about ETFs, visit our ETF Center.

For more ETF Foolishness:

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds mentioned in this article. The Motley Fool has a disclosure policy.

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