New Russian Ruble ETF Offers Several Interesting Trading Possibilities 13 comments
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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.
Russian Economy
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 (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.
- More on Currency ETFs and ETNs
- XRU Overview
- XRU Prospectus (pdf)
- XRU Fact Sheet (pdf)
- NYSE Press Release
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This article has 13 comments:
Your article quotes two guys suggesting two "ideas". Both "ideas" are from the sell side guys and surprise, surprise, both involve buying XRU :)
Is there actually any truth to what those guys are saying?
Did you have a chance to investigate that?
First, I'm not 100% sure how Ruble can have high degree of correlation the Euro and to crude at the same time, if Euro doesn't have particularly high correlation to crude. So either one idea is bogus or another or both.
Btw, in the other version of mr Bak's quote, correlation to the crude was stated as 89%. I guess someone finally looked at the 6 months chart of ruble vs crude and decided that 89% needs to be stricken from the record :)
Second, while central bank may have set the rate at 12% and XRU might even "pay the 15.5% as of last Friday", I have a very difficult time understanding how these statements aren't misleading. According to the prospectus, JPM in London will hold ruble deposits of the fund and will pay an interest rate currently set to 3.8%. According to the prospectus fund will deduct management fees from interest earned and pay the rest as dividend. Where is 15.5% going to come from i'm not sure, but if it is really going to be paid, it must come from the NAV.
These two issues have nothing to do with the fact the ruble may be a short or long candidate. That's not where the focus should be when the new "product" comes to market. Let us first see if the product is actually going to deliver what it promises.
From what I can see so far, the guys on the sell side are misleading the public by suggesting strategies that can't be implemented using the fund and having journalists and bloggers put out articles where these strategies go under the titles such as "fund uses" or "possible trading strategies".
Possible? Sure, but not with this fund.
I have to wonder how JPM got such a sweet deal. Hold ruble deposits and pay 3.8% on those.
These guys are making a killing!
Jonathan, Could you do me a favor, I really need my confidence in "people are generally good" restored,
Would you mind explaining to me how I misunderstood everything in the prospectus, how you did the investigative journalism part, how 3.8% is really 15.5% and how these guys are actually honest sales men delivering good product to the market and average investor is not being misled and treated like a fool.
Once that is out of the way, I'll be glad to discuss if ruble is a long, a short, if russians can be trusted, etc :)
Please excuse my tone but this is a 3rd time i'm trying to get someone to explain to me how wrong i am about XRU and so far everybody ignored me so i figured i need to bring it up a notch to get responses :)
If this number continues to grow at this rate XRU would become a fair product soon. maybe this rate will really become 15.5% in a few weeks? :)
Could you tell me where you got those numbers from? 15.5%? 20%?
The only update to the prospectus that I can find mentioned 6.05%.
When you say "It is currently over 20%" what do you mean by "it"? do you mean the rate JPM London branch pays to the fund or do you mean some other rate i can get somewhere else on ruble deposits?
I'm interested in the rate JPM London branch is paying, not any russian central bank rate or any other rates as they have nothing to do with this fund.
On Nov 19 02:14 PM Jay H wrote:
> The rate was 3.8% at the time of the prospectus writing and shot
> up to 15.5% recently. It is currently over 20%. It is clear enough
> to me.
As far as I can tell, the rate listed here (www.currencyshares.com...) is the rate paid out by the fund, which I am told will be done on a monthly basis. At the time of the prospectus, the central bank rate was considerably lower. As Moscow continues to raise rates, the fund's monthly payout rises.
Hope this helps.
On Nov 19 06:58 PM Vladimir Senkov wrote:
> I'm glad it's just me.
> Could you tell me where you got those numbers from? 15.5%? 20%?<br/>The
> only update to the prospectus that I can find mentioned 6.05%.<br/>When
> you say "It is currently over 20%" what do you mean by "it"? do you
> mean the rate JPM London branch pays to the fund or do you mean some
> other rate i can get somewhere else on ruble deposits?
> I'm interested in the rate JPM London branch is paying, not any russian
> central bank rate or any other rates as they have nothing to do with
> this fund.
>
> On Nov 19 02:14 PM Jay H wrote:
These numbers do not make sense. Central bank rates did not change that much.
When initial prospectus came out with 3.8% central bank rate was 11%.
I understand that prospectus was amended on November 7th with 6.05%. That was less than two weeks ago.
Central bank rate went up 12% on Nov 12th.
If you call 11% considerably lower than 12% I am going to have to disagree here in the context of 3.8->6.05->20 discussion.
Why would JPM London branch move their rate from 6.05 to 20 in just a few days if no other bank has done that?
No russian bank currently pays 20% on ruble deposits.
Foreign banks holding ruble deposits typically pay less than russian banks.
If 20% is going to be paid it would have to come from the elsewhere, but prospectus states that interest would be distributed after interest is earned after deducting the management expense.
It seems to me that 20% number is erroneous and real number is still unknown, but is most likely to end up being 6.05%?
Or the payout number really could be 20% but it's not generated by the interest paid on deposits and comes from somewhere else entirely. If it does come from somewhere else than my original question remains: why does JPM get to make a killing while the ordinary guy thinks he is only paying 0.4% management fee.
There are errors on that webpage btw, for example, the link to edgar filings currently points to Australian dollar filings . . .
Not a big deal but it shows that QA process is lacking and if 20% was indeed a typo it is possible that it just wasn't caught.
When something looks too good to be true it usually is. And 20% is definitely too good to be true.
So what's the rate JPM is paying on those ruble deposits?
If you are still convinced it's 20%, would you mind a small wager?
On Nov 19 10:18 PM Jonathan Liss, SA Editor wrote:
> Valdimir,
>
> As far as I can tell, the rate listed here (www.currencyshares.com...)
> is the rate paid out by the fund, which I am told will be done on
> a monthly basis. At the time of the prospectus, the central bank
> rate was considerably lower. As Moscow continues to raise rates,
> the fund's monthly payout rises.
>
> Hope this helps.
i guess since the rate changes dramatically and on a daily basis there is no telling what the effective rate will end up being for an investor willing to buy or short it. so any of those strategies being suggested are a gamble with yet another unknown variable.
i think my original point of not being able to collect 12% while using XRU for either carry trade against the euro or as a pair against oil is sufficiently clear now. looking at the volume of this thing, it looks like i wasn't the only skeptic.
On Nov 19 02:14 PM Jay H wrote:
> The rate was 3.8% at the time of the prospectus writing and shot
> up to 15.5% recently. It is currently over 20%. It is clear enough
> to me.
My answer: I have no idea! the figure on the website changes daily and ranges from 3 to 21%. right now it's 21. I don't believe this rate can be correct. My humble attempts to figure out funds interest paying policy have failed so far. Prospectus states one thing, website shows something else. I haven't heard any good explanations from anyone so far.
My current opinion, based on the data i've seen so far, is that this fund is to be avoided. No matter what your strategy may be, if you could be wrong to the tune of 20% it becomes a real gamble, not a very educated one at that.
If we must learn one thing from this "crisis" and from the situation where a single guy managed to lose $50B of clients' money running a ponzi scheme, it's that _ANYTHING_ that isn't 100% transparent is bound to negatively surprise us one day or another. It may take 20 years, but it is bound to happen.
Based on the trade volume, I suspect that others who looked at this fund came to a similar conclusion.
I'm sorry to have come to this conclusion, but all "articles" I found so far were quoting each other and execs suggesting "interesting ideas" about how this fund could be used are nothing but a sell side push, a very obvious one at that.
I wish they pushed something with a little more substance, making this investment vehicle a little more transparent.
But I guess they thought there is such a lack of sophistication out there in the investment community these days that this would suffice. I guess they were wrong (based on the volume so far).
On Dec 15 07:04 PM adamnb wrote:
> But if you short the fund, wouldn't you have to pay the interest?
>