Currency ETF Returns: Understanding Expected Growth & Risks

The expected returns from a currency ETF will vary from currency to currency, but are generally modest. While there is a degree of variability in relative currency prices, these moves tend to be relatively small and you will need to hold the position for an extended period to see them. If you had invested in the ETF which tracks the Japanese yen (FXY), for example, you would have seen a trading range of about ten percent for the past year. While this is a respectable return, most currency traders use futures in order to realize sizable gains. Futures have a high level of built-in leverage, meaning that you can generate large returns with a small amount of capital.

A move in a currency that would be considered large in the context of the currency market, will not get you a large return if you are investing in ETFs. A 2% move in the yen is very significant. If you own the ETF, you will receive an extra 2% for every dollar invested. If you have invested in futures, you might receive an extra 20% for every dollar invested. Leverage can be dangerous, however, so currency ETFs are a great way to learn to trade currencies. They also serve other purposes, liking helping you to hedge in certain circumstances.