Currency exchange

Published: June 2, 2008 12:01 a.m. ET


ETFs and ETNs for investing in worldwide currencies



BOSTON (MarketWatch) -- Wall Street continues to mint exchange-traded products that let individual investors in the U.S. diversify their greenback-denominated portfolios by investing in foreign currencies around the globe.

Whether investors want to track the movement of the English pound sterling, the Indian rupee or some other currency, chances are there's an exchange-traded fund or note to suit their needs. The two financial products have some similarities, but ETNs are set up as debt instruments issued by institutions, while ETFs are more akin to traditional mutual funds.

Currency ETFs and ETNs can be used to speculate on notoriously unpredictable currency markets, or more conservatively to diversify and hedge. These financial instruments use different strategies for getting exposure to currencies. Some use futures contracts, for example.

Rydex Investments manages a lineup of currency ETFs that are listed on the NYSE Arca: CurrencyShares Australian Dollar Trust FXA, -0.13% CurrencyShares British Pound Sterling Trust FXB, -0.08% CurrencyShares Canadian Dollar Trust FXC, +0.09% CurrencyShares Euro Trust FXE, -0.52% CurrencyShares Japanese Yen Trust FXY, -1.13% CurrencyShares Mexican Peso Trust FXM, +0.21% CurrencyShares Swedish Krona Trust FXS, -1.02% and CurrencyShares Swiss Franc Trust FXF, -0.17% The ETFs are structured as grantor trusts and have expense ratios of 0.4%, according to the prospectus.

They hold foreign currencies in overseas interest-bearing accounts, and their value is determined by the movement of that currency versus the U.S. dollar. The Rydex currency ETFs also pay a yield which is tied to local interest rates, minus fees. The Rydex CurrencyShares pay out interest income on a monthly basis, which is taxed as ordinary income. Meanwhile, any short-term or long-term gains in the ETFs due to currency moves are taxed at the ordinary rate up to 35%.

The CurrencyShares Euro Trust holds about $1.5 billion in assets, and was up more than 19% for the year ended May 28, benefiting from a weaker U.S. dollar.

Despite its strong performance, currency speculating is difficult at best because it depends on a complex, interlocked mix of economic factors. A "sounder reason" to invest in a currency fund such as CurrencyShares Euro Trust "is to protect a portfolio's value, or at least reduce its volatility, by hedging its currency exposure," wrote Morningstar Inc. analyst Emiko Kurotsu in her latest report on the ETF.

British banking giant Barclays BCS, -2.09% offers a handful of currency exchange-traded notes, including iPath EUR/USD Exchange Rate ETN ERO, -2.15% for the euro, iPath GBP/USD Exchange Rate ETN GBB, -0.46% for the British pound and iPath JPY/USD Exchange Rate ETN JYN, -10.95% for the Japanese yen.

Last year, currency ETNs were dealt a setback when the IRS essentially took away a key tax advantage of the products relative to their ETF cousins. Read more on currency ETNs' tax treatment.

There are also more sophisticated currency ETFs and ETNs that seek to replicate the so-called carry trade. The PowerShares DB G10 Currency Harvest Fund DBV, -0.06% is an ETF tracking an index made up of currency futures contracts selected from the Group of Ten, or G10, currencies.

The index tries to exploit the historical trend that currencies with higher interest rates tend to rise relative to those with lower rates. It reflects long futures positions in the three currencies with the highest interest rates, and short positions in the three with the lowest rates. See related story on this ETF.

Meanwhile, iPath Optimized Currency Carry ETN ICI, +0.45% employs a similar strategy of investing in high-yielding currencies with the exposure financed by borrowing low-yielding currencies.

ETF manager WisdomTree Investments Inc. WSDT and Dreyfus Corp. have partnered to launch several currency-themed ETFs, such as WisdomTree Dreyfus Euro Fund EU, +10.00% WisdomTree Dreyfus Japanese Yen Fund JYF WisdomTree Dreyfus Brazilian Real Fund BZF, -0.14% WisdomTree Dreyfus Chinese Yuan Fund CYB, +0.08% and WisdomTree Dreyfus Indian Rupee Fund ICN, +0.05%

Finally, there are ETFs that offer bearish or bullish plays on the greenback: PowerShares DB US Dollar Index Bullish UUP, +0.42% and PowerShares DB US Dollar Index Bearish UDN, -0.54% See previous article.

Quote References

  • FXA
    -0.10 -0.13%
  • FXB
    -0.10 -0.08%
  • FXC
    +0.07 +0.09%
  • FXE
    -0.54 -0.52%

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