The Russian Are Coming
Rydex launched a ninth CurrencyShares ETF on the NYSE Arca platform Thursday, giving investors the first Russian ruble exchange traded fund. The fund, which trades under the ticker symbol XRU, offers U.S. investors a long ruble/dollar pair trade. It holds 1,000 rubles per share and closed 3 cents above its NAV of $36.36 yesterday. The fund charges 0.40% in expenses, in-line with other CurrencyShares funds, and slightly cheaper than other emerging market currency funds.
Russia’s economy has been especially hard hit by a deadly combo of plummeting oil prices and the global economic downturn. The result has been chaotic trading that has forced the country’s major exchanges to shut their doors regularly as they try to stem the tide of asset outflows. The Market Vector Russia ETF (NYSEARCA:RSX) is down 73% YTD as a result and the ruble hit a two-year low against the surging U.S. dollar in October. Demand destruction in most commodities is expected to continue taking its toll on Russia’s resource-heavy economy for the foreseeable future.
Possible Trading Strategies
Other than using XRU as a pure play on the ruble, several other interesting plays for the new fund have been suggested. Eric Rosenbaum of Index Universe quotes Rydex’s Director of ETF Strategies, Ed Lopez, as suggesting a long ruble/short euro pair trade. These two currencies “have a particularly high correlation, so investors can short the euro and its smaller yield (due to central banking policies in Europe) and go long the ruble, which has a central bank rate of 12%.”
Another way to take advantage of the ruble’s high yield was suggested to me by Rydex Senior Product Developer, Phil Bak, who points out the ruble has a fairly high correlation to the energy sector in general and to crude prices specifically. By shorting oil and going long XRU, investors can collect the current interest rate of 15.5% (as of Friday), paid out monthly, while minimizing risk to their underlying capital.
Another benefit of XRU pointed out by Bak is that it’s the first BRIC country currency fund to employ an ETF – as opposed to an ETN – structure. The inherent risks of the ETN structure, which is essentially an unsecured debt offering from the issuer, became clear with Lehman’s bankruptcy, and the subsequent implosion of the company’s Opta ETNs.
As quoted in the Index Universe story linked above, Lopez concedes the fund may be slow to gather assets in the current environment, as BRIC currency carry trades have dried up for the time being. Still, Rydex remains confident in the superior structure and overall demand for such an ETF. XRU ended its first day of trading with just over $3.6 million in assets.