Another Currency ETF

In September, PowerShares launched a new innovative ETF (Exchange Traded Fund) based on currency trading: Powershares DB G10 Currency Harvest Fund (DBV) that simulates the so-called currency carry trade, tracking a Deutsche Bank AG index comprised of six of the Group of Ten, or G10, currencies: U.S. Dollar; Euro; Japanese Yen; Canadian Dollar; Swiss Franc; British Pound; Australian Dollar; New Zealand Dollar; Norwegian Krone, and Swedish Krona. The index is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates.

Accordingly, this sophisticated index reflects long futures positions in the three currencies with the highest interest rates, and short positions in the three with the lowest rates. However, if the U.S. dollar is one of the three highest or lowest-yielding currencies, the ETF will not take a long or short position because investors are already buying shares with their home currency. The leveraged long-short index reviews the currencies of countries with the highest and lowest rates and rebalances quarterly.

The new fund is different from single-currency ETFs, such as those managed by Rydex Investments, another ETF provider (read our past posting). For example, the Euro Currency Trust (FXE) buys Euros, rather than currency futures, in a primary deposit account to provide investors with exposure to the exchange rate between the U.S. Dollar and the Euro.

Although U.S. investors may use this ETF as a long-term diversification tool for U.S. investors, one must note that currencies are generally volatile and the temptation to engage in potentially damaging and costly trading could be high.