The New Currency ETFs Add Little For Investors

I normally don't write (or read for that matter), much on the over-abundance of ETFs available out there. I'll defer that to the expert that has more than a handle on it, Roger. But the good folks at Seeking Alpha wanted to see if I had an insight into the recently available currency ETFs (listed below).

In the back of my mind, I've actually had the idea of bringing to market an ETF of my own. So, the request was met with a great deal of interest to see what's out there and how they may benefit an investor.

After researching the ETFs, I've come up with the conclusion that it is merely a supped up way of going to the bank and exchanging $100.00 for the equivalent in euros, yen, or whatever other currency you may be interested in, without the hassle of margins. The only real difference is that you will be given a discounted overnight interest rate, while forgoing the nagging margin requirements and ability to over-leverage.

Understanding how a currency ETV... (notice the "V") operates, is one of the first steps in determining whether or not you should get involved in the instrument. To begin, an ETF is an instrument that gives an institutional investor the ability to deposit money with the ETF. Then, the ETF basically diversifies the money into whatever the base equities are traded in the fund. An ETF, then, basically becomes a way of block trading a group of stocks. These groups are offered for trade to retail investors similar to a closed-end mutual fund on the open market.

Enter the "V" factor.

Oil. Gold. Bonds. Currencies. These are all commodity products that have recently been added to the list of ETFs. But unlike their stock counterparts in an ETF, there is no basket of stocks to trade. Instead, a currency ETF would see a deposit into the account of the ETF. The ETF would simply buy whatever currency was traded and place the deposit into a bank. Then, whatever price movement, or valuation changes, that occurred would either increase or decrease the value of the amount deposited (changing the value of the ETV).

Since there is only one currency being purchased, the ETF could not really be called a "Electronically Traded Fund", but is called an Electronically Traded Vehicle.

For an institution or business that is exposed to the fluctuation of prices in a currency, I could see why a vehicle that provides a hedge against this exposure to be in demand. However, if an institution is interested in hedging against the exposure of, say $125k against the euro, what's to stop them from just going down to the bank and buying the equivalent in euros and depositing them is said bank and earning the full amount of interest? Unless of course you actually were thrilled with the idea of getting less money in interest overnight while simultaneously paying a "processing" fee.

As far as I can tell, the new ETVs don't offer the ability to enter into forward contracts. Enter the Chicago Mercantile Exchange... which has been trading these instruments for some 20 years. If a business needed to purchase a certain amount of currency deliverable in the future, at a specified rate of exchange, then the Merc is your instrument. I don't see how the new ETVs have added anything exciting to the mix. Just something new. And for that matter, do we really need another vehicle?

Seems to me, instead of building a better paperclip, a more cumbersome paperclip was built because someone could do it... Not because it was better.

However, there is always the secondary market that I mentioned earlier. This is perfect for retail traders that want to trade the currency.

Or is it? The current price of the ETV for the euro is $76.61. If you bought 1 lot, or 100 shares, your amount used in the purchase is $7,661.00. This puts the smaller retail client out of reach of the ETV. What's more, I can name a couple of brokerage firms that will let you trade $1.00 on their currency platforms. The margin on that would be a whopping $.20. Yeah, twenty cents. And, there are a lot more available currencies to be traded than the current amount of ETVs. So the idea that there is a better vehicle to trade is fading out in the distance.

I've just not found a reason for the ETV to garner a whole lot of attention. There are too many alternatives that are less cumbersome with more options and less expense.

I'll stick to the brokerages, the Merc, or my local bank if I want to take advantage of any price fluctuations in the FX markets... until these currency ETVs offer some kind of sexy incentive like entry into an exclusive club that gives me unlimited use of the company jet, complete with a full bar.

I may be interested then.

Currency ETFs:

Euro Currency Trust (FXE)
DB Currency Index Value Fund (DBV)
Australian Dollar Trust (FXA)
British Pound Sterling Trust (FXB)
Canadian Dollar Trust (FXC)
Mexican Peso Trust (FXM)
Swedish Krona Trust (FXS)
Swiss Franc Trust (FXF)

Comments

[Elliott]

>>The current price of the ETV for the euro is $76.61. If you bought 1 lot, or 100 shares, your amount used in the purchase is $7,661.00.

[Elliott]

Let's try that again. I think the price quoted in the article ($76.61) is for the Australian dollar ETF, not the Euro. The Euro ETF, symbol FXE, goes for $128.44. It's up 6.8% for the year, which is not too bad. I think currency ETFs could have a place in 401k's and IRA's, if there are account restrictions against futures and holding currency outright.

[AndrewHerdman]

Indeed, the new currency ETF's seem like a complicated wrapper for what is in essence an unleveraged foreign currency deposit. Outside the US, banks routinely offer multi-currency accounts and term deposits to retail investors which would achieve the same result. A currency ETF would only make sense if it offers tighter exchange rate spreads and competitive interest rates.

In any case, US investors wanting to hedge US dollar currency risk in their portfolios would be better advised to invest in non-US stocks and bonds rather than foreign cash deposits.

[raj]

What is the ticker for the Inverted Dollar ETF?

Thanks in advance, - raj -