Over $4 trillion dollars are traded everyday on the foreign exchange market, offering investors significant opportunities to profit from currency exchange rate fluctuations. Although FOREX is one of the most popular platforms for buying and selling cash, it is not the only option for trading currencies. Other securities, such as currency exchange-traded-funds, also have upsides relative to investors’ financial goals.

Currency Pairs vs. ETFs

FOREX allows investors to trade currency pairs, which are comprised of a base currency and a counter currency. This method of investing in cash is different compared to trading stocks, bonds and derivative instruments on the New York Stock Exchange or the NASDAQ, among other financial exchanges. Currency exchange-traded-funds, however, are often comprised of multiple sets of securities that are impacted by fluctuations in currency exchange rates. Examples of these funds include FXE (Euro), FXA (Australian Dollar), FXY (Japanese Yen) & FXC (Canadian Dollar).

Advantages of FOREX

FOREX is the most direct method for investing in currencies and trying to profit from exchange rate spreads. The features on this platform make buying and selling currency pairs straightforward. Plus, it is possible to trade 24 hours a day, five days a week, which is a distinct advantage compared to other financial markets. Investors can use FOREX trades to mitigate portfolio risk, speculate in the market or conduct research and apply the lessons learned to broader investment strategies.

The features and benefits of FOREX include:

• Platform specifically designed for currency trading

• Competitive pricing even on tight spreads

• Premium trading tools

• Trusted market-maker and financially stable

• Research focused on currency and currency-related events

Advantages of Traditional Brokerages

If investors are looking to diversify their portfolios with currency ETFs and derivatives, they will have to use brokerages such as Scottrade or TD Ameritrade. These brokerages allow investors to make their own selections, but also offer portfolio management services at an extra cost. A main benefit of using a traditional brokerage is the variety of securities that investors get to choose from. The cost structure is also different and is often based on a per-trade rate that varies between brokerages. Under certain circumstances, the per-trade rate can be more cost-effective for traders relative to FOREX spread rates.

Hybrid Brokerages

There are also brokerages that allow traders to invest in traditional securities and FOREX currencies, making it easier to diversify portfolios and optimize investment strategies. One such example is TradeKing, which gives investors the opportunity to add FOREX currencies and ETFs their portfolios. Although FOREX has sister companies and affiliates, it doesn’t directly offer currency ETFs or futures contracts. As of the date of publication, TradeKing charges $4.95 for ETF trades, which is cost-effective relative to other online trading platforms.

By trading currency pairs on FOREX, investors that know how to time the market can hedge portfolio risk and generate favorable returns. However, there are also advantages to obtaining currency ETFs to profit off exchange rate fluctuations. Individual investors must evaluate their goals and select the investment vehicles needed to optimize their portfolios.