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As with other types of exchange traded funds (ETFs), it’s easy to build a diversified portfolio of currency ETFs if you understand your options and how they work.

The currency market, or FX market, is the the largest and most liquid market in the world. Most individual investors shy away from them, thinking that they’re too complicated or not fully understanding how they can contribute to a diversified portfolio. Matthew McCall for Investopedia reports that there are currency ETFs to represent many nooks and crannies of the globe:

  • The U.S. Dollar: The U.S. dollar is typically the currency used to base the movement of other foreign currencies. Many major media and financial trends in currencies are all based against the U.S. dollar. You can get exposure to the dollar primarily through either PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) or PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN). [Trends In The Euro, Yen And Dollar.]
  • Euro, Yen and Pound: One of the best hedges for a weak U.S. stock market has been the Japanese yen, while a currency that is generally out of favor of late is the British Pound. The euro has taken a major hit, falling 15% in the first six months of 2010 before attempting a rally. In June, the euro was trading at the lowest level in over four years and over 25% lower than the all-time high in 2008, says McCall. A few ways to play these currencies include WisdomTree Dreyfus Euro (NYSEArca: EU), CurrencyShares Japanese Yen (NYSEArca: FXY) and CurrencyShares British Pound (NYSEArca: FXB).
  • Emerging Market Currencies: The introduction of emerging market currency ETFs has brought on more investment opportunities, but they have yet to catch on. Investors have access to the Brazilian real, Chinese yuan and the Indian rupee to name a few. You can get exposure to emerging market currencies through funds such as WisdomTree Dreyfus Brazilian Real (NYSEArca: BZF) and WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW). [How To Play Currency Moves With ETFs. ]

Mark Nicholas for Counting Pips reports that forex isn’t for everyone, but ETFs give retail investors the best way to get their fix. There’s no need to be bound to your computer and you can also get exposure to a wide range of currencies without necessarily having to understand or consider the day-to-day volatility of the market. But monitor currency ETF closely, and don’t treat them as buy-and-hold tools – this market moves quickly. [Our Guide to Currency ETFs.]

For more stories about currencies, visit our currency page.