Currency Exchange Traded Funds (ETFs)

Currency ETFs can provide investors with the opportunity to gain exposure to the performance of selected foreign currencies. Currency ETFs work in a similar way to most other conventional ETFs in that they are designed to track the performance of an underlying investment. In the case of a currency ETF, the performance is the change in value of the underlying currencies.

For example, a US Dollar ETF aims to track the change in value of the US dollar relative to the Australian dollar before taking into account fees and expenses. In other words, if the US and AUD are at parity in other words, $1 AUD = $1USD and the US dollar rises by 5% against the Australian dollar (rises by 5 cents) so in other words, the Australian dollar falls by 5% (5 cents) the price of the ETF should also rise by 5%.

The assets of each currency ETF are invested in bank deposits 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 the interest exceeds the fees and expenses of the ETF.

The deposit accounts for the currency ETFs currently available on ASX are held with JP Morgan Chase Bank.

Why use currency ETFs?

Currency ETFs can assist investors gain exposure to the FX asset class in a simple and cost effective way. Currency ETFs can be bought and sold through any ASX broker in the same way as you would any other share investment. Other benefits of currency ETFs include;

  • Low Cost - ETFs are typically able to achieve lower operating costs and therefore lower fees than alternative forms of accessing this asset class
  • Simple and secure - the ETF holds actual foreign currency in bank deposit accounts
  • Correlation to other asset classes - historically currencies typically have had a low correlation with other asset classes allowing investors to diversify their portfolio
  • Liquid - currency ETFs have assigned Market Makers to assist in providing liquidity in the market
  • Buy / sell flexibility - As ETFs are traded on ASX, this means you can buy and sell at any time during the ASX trading day
  • SMSFs - currency ETFs can be used within a SMSF (self managed superfunds)

Market Making

Market Makers provide an important role in ensuring that buyers and sellers of ETFs and ETCs can transact. They provide liquidity to the market by providing quotes through the trading day and update their prices to reflect changes in the underlying securities.

ASX offers a Market Making incentive scheme to further promote tighter spreads and more liquidity in the ETF (Exchange Traded Funds) and ETC (Exchange Traded Commodity) markets. Market Making Participants receive Trading and Clearing Fee incentives from ASX when achieving minimum quoting benchmarks on a monthly basis. Each ETF / ETC is assigned a spread and liquidity requirement.

The table found in the following PDF (224KB) shows the Market Makers (MM) that have signed incentive contracts with ASX and the relevant ETF/ETCs.