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If investors desire to track the movement of currencies, such as the Indian rupee, or the English pound sterling, or some other currency, more than likely there is an exchange-traded fund (ETF) to meet their needs.

Currency ETFs can and are being used to speculate on the notoriously unpredictable foreign currency markets. They are also being used to diversify and hedge portfolios. They use different investment strategies for getting exposure to currencies. For example, some may use futures contracts.

The funds hold foreign currencies in overseas interest bearing investments and accounts. The funds value is determined by the movement of that foreign currency versus the U.S. dollar.

Rydex has some currency ETFs which also pay a yield that is based upon local interest rates. The Rydex Currency Shares pay out their interest income once a month. However, it is taxed as ordinary income. Also, any short or long term capital gains in the ETFs due to currency moves are taxed at the ordinary rate up to 35%, same as other capital gains.

Currency trading and speculating is very difficult at best. It depends on a complex, interlocked mix of economic factors. rather than short term trading, a better reason to invest in a currency trading fund such as the Currency Shares Euro Trust is to protect and hedge a portfolio's value by reducing  its volatility.

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