US dollar Sector
Best ETFs Australia has a sector for US Dollar ETFs and funds which invest in cash accounts or deposits in the United States. This sector includes ETFs which provide exposure to the Australian dollar to US dollar exchange rate.
Meaning, ETFs in this sector bucket would move in the same direction to the "Aussie dollar", commonly displayed on the evening news.
For example, if the "Aussie dollar", as quoted in the news, fell 1%, ETFs in our US Dollar sector would fall 1%.
Investors can use ETFs in this sector to get exposure to the exchange rate. Keep in mind the ETF is unlikely to exactly match the movements in the currency pair over longer periods (3-6 months or more) because:
- ETFs in this sector often take investors' money and put it in a bank account, which earns interest (which adds to the return of the ETF)
- ETFs have fees and costs (which subtract from the return of the ETF)
US dollar Sector Risks
Predicting the direction of currency markets happens to be one of the most difficult markets to forecast.
Here are some of the general risks for currency ETFs or funds that provide foreign currency exposure listed on the ASX:
- Currency risk – the value of your investment could fall considerably if the Australian dollar appreciates (i.e. goes up) against another currency.
- Geopolitical risk – the value of your investment in a currency ETF could be significantly influenced by factors outside of your control, including political, regulatory, interest rate and inflation risks, to name a few. Each of these externalities is likely to influence the relative value of the Australian dollar.
- Counterparty risk – to operate currency ETFs effectively, ETF issuers will rely on contracts with third-parties such as the custodian, local or foreign banks and market makers. These parties could fail to perform as expected.
- Benchmark risk – With fees, costs, spreads and interest earned, there’s a chance a currency ETF’s price will deviate from the benchmark exchange rate over time. In the short term, this ‘tracking error risk’ may appear to be minimal but over time it could compound into noticeably negative underperformance. This risk is minimised if you take a shorter-term view of the currency.
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This brilliant (and free!) report is issued by Best ETFs Australia, a division of The Rask Group Pty Ltd. It is not a recommendation.
Speak to a financial professional before relying on this information and please read our Financial Services Guide (FSG).