New Currency ETNs from Barclays

Barclays has announced the launch of 3 new Exchange Traded Notes (ETNs). As we discussed in our past postings, ETNs trade like stocks or Exchange Traded Funds (ETFs), but they're debt instruments, meaning that investors are exposing themselves to risk that the issuing bank will go bankrupt.

Barclays already had other currency ETNs in its product lines: iPath EUR/USD Exchange Rate ETN (ERO) , iPath GBP/USD Exchange Rate ETN (GBB) and iPath JPY/USD Exchange Rate ETN (JYN) . The new ETNs are:

The Carry Trade ETN: The carry trade involves borrowing money in low-yielding currencies and investing it in high-yield currencies. This fund involves using long and short forward positions in G10 currencies to execute the trade. Among others, the index has holdings in the Norwegian krone, New Zealand dollar, Swiss Franc and Australian dollar. The fund has an expense ratio of 0.65%.

Barclays GEMS Strategy: GEMS stands for Global Emerging Markets Strategy. The fund is a 15-currency money market account that covers five geographic zones, including Eastern Europe, Africa and Latin America. It has a 0.89% expense ratio.

Asian and Gulf Revaluation: This one has exposure to five Middle Eastern and Asian market currencies that are tied to the U.S. dollar. It carries an expense ratio of 0.89%.

Readers should, however, take note of a related IRS ruling that these currency ETNs should be taxed as debt, and that gains from interest income and currency appreciation will be taxed as regular income tax.

Two New Currency ETFs

Today Deutsche Bank and Amvescap unit PowerShares Capital Management LLC launched a pair of exchange-traded funds (ETFs) in the American Stock Exchange, which allow investors to make money from the movement of the U.S. dollar against a set of foreign currencies:
PowerShares DB U.S. Dollar Bullish Fund (UUP) &
PowerShares DB U.S. Dollar Bearish Fund (UDN) .

These new ETFs allow investors to play currency markets around the world without opening a futures account. These are designed to take long or short positions in the "Deutsche Bank U.S. Dollar Index Futures Index -- Excess Return," which follows the movement of the U.S. dollar against a basket of 6 major currencies: Euro, Japanese Yen, British pound, Canadian dollar, Swedish Krona and Swiss Franc. The "dollar bullish" ETF (UUP) will make money when the dollar rises against global currencies, while the "bearish" fund (UDN) will profit when the U.S. dollar falls.

The ETFs have expense ratios of 0.55%, but that will be offset by the yield from the fixed-income securities they hold as collateral for the futures contracts. Aside from the movement of the futures contracts, investors are expected to earn the yield on 3-month Treasury bills (current yield is about 5%). But, like all ETFs, they also have the disadvantage of the extra expenses of broker commissions for any transaction.

Last year, the company launched the PowerShares DB G10 Currency Harvest Fund (DBV) which is designed to take long futures positions in the 3 foreign currencies with the highest interest rates, and short the 3 currencies with the lowest yields (read our posting on DBV)

In December 2005, Rydex Investments introduced a family of 8 ETFs tracking the currency of single countries (See our past posting on Rydex ETF).

Everbank's Foreign Currency CD

Foreign Currency CD? Never heard the name? The Jacksonville, Florida based Everbank introduced such a unique investment vehicle in late 2005. Certificate Deposits or CDs are usually referred to as a safe haven in the ever-changing world of investment and are quite popular with retired people who do not wish to take a chance with their hard-earned money at a late stage of their life.

All you need to do in CD investment is just putting your money in for a fixed term, earning a set rate of interest and knowing exactly how much you'll get back at the end of the term. Everbank CDs do not fall in this stereotype. These CDs could pay you back much more or much less. That's because the Everbank CDs are bets on the value of the dollar. At the time of purchase, you select an investment amount ranging from $2,500 to $20,000 and also pick the currency or a mixed bag of currencies that you want to invest in. Everbank then purchases government bonds issued by the country or countries of your choice. These bonds pay a set rate of interest, but the real return or loss comes from the exchange rate.

At the time of maturity, if the currencies you bought are comparatively stronger than the dollar, you can make much more profit than just the interest. As we may be aware, in recent months, some world currency CDs have paid hefty annual returns because of falling dollar value. On the other hand, if, during the investment period, the value of the dollar rises, you could end up with less than what your initial investment was.

We feel, if you are interested in forex or foreign investment, it's better to do that directly through foreign currency trading or by buying foreign stocks, ETFs or mutual funds. Everbank CDs sound too risky to us. It's just good to know that such a kind of investment exists. Who knows, if at a certain point in time, you are able to make a good guess of the direction of dollar value in future, you may consider having such CD in your portfolio.

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.

Currency-based Exchange Traded Funds

In December 2005, Rockville, MD-based Rydex Investments introduced the first currency Exchange Traded Fund (ETF): Euro Currency Trust (FXE) whose current asset value is about $635. The fund is designed to rise in value when the euro strengthens relative to the dollar, and fall when the euro weakens. So, such currency ETFs are similar to money-market funds but denominated in foreign currencies, which are held by the depository for the trusts, the London branch of J.P. Morgan Chase Bank.

Following up on the success of FXE, Rydex Investments listed six more currency-based ETFs in June on the New York Stock Exchange. These funds are:
Currency Shares Mexican Peso Trust (FXM)
Currency Shares Swedish Krona Trust (FXS)
Currency Shares Australian Dollar Trust (FXA):
Currency Shares British Pound Sterling Trust (FXB)
Currency Shares Canadian Dollar Trust (FXC)
Currency Shares Swiss Franc Trust (FXF)
The first 2 funds hold about 1,000 pesos or kronas. The last 4 funds hold about 100 of their respective currency units.

All these funds have low expense ratios of 0.4% of assets. These ETFs also provide a yield based on overnight interest rates in the country of the currency it holds.