Currency ETFs Slowly Dying - High Spreads, High Fees, Low Volume
At first I thought currency ETFs were rather interesting. They were the only way to get into currencies without a forex account or a brokerage account, which very few stock traders actually possess. If anything I would have expected these funds to gain a lot of traction, especially with how volatile the currency markets are right now. A look into why they’re disappearing and what may be next for currency ETFs.
They’re certainly a dying breed on Wall Street. Apparently people who trade on the NYSE just aren’t interested in currencies, or they never really got started with them.
Take a look at any of the currency pairs you see here and you might see where the problems are coming from.
VOLUME
An exchange-traded fund can simply not sustain itself without ample volume. Volume is important not only to allow liquidity in the exchange-trade fund (when you want to sell, you want to sell). But also to drive down the spread between the bid and ask prices.
SPREADS
So spreads aren’t very important, nor are they large, on any popularly traded ETFs. Generally they’re tiny, fractions of a cent on the most electronically traded ETFs. But when there is little volume, and tiny amounts of interest on the exchange, the spreads on the ETF will be too large to sustain. Investors do not want to pay a $.25 spread between bid and ask on a $50 share. That’s an effective loss of .5% with each complete buy and sell.
To compare, most forex brokers offer spreads as low as .0003 of the purchasing price of the currency. For a $100,000 order, that’s $30. $100,000 in an ETF would be about $500. The spread difference is huge.
Simply put I cannot foresee currency ETFs working feasibly as the stock market works today. They’re too costly, poor at tracking, and very few people are taking an interest in them. While it is clear that index funds are going nowhere, you’re going to have to start looking in other places to get into currencies.
