Latest from WisdomTree: An Emerging Market Currency Basket ETF

By Patrick Watson

Foreign currencies have been all the rage in the ETF business for the last couple of years. The major currencies are all well-represented and in some cases can be traded in leveraged and inverse versions as well. Product developers, looking for new ways to attract assets, are now going further out the risk curve to emerging market currencies. The latest: WisdomTree Dreyfus Emerging Currency Fund (CEW), which began trading today.

WisdomTree already offers four ETFs that track individual emerging market currencies including the Indian Rupee (ICN), Chinese Yuan (CYB), Brazilian Real (BZF), and the South African Rand (SZR). CEW tracks those four currencies plus several others: Mexican Peso, Chilean Peso, Polish Zloty, Israeli Shekel, Turkish New Lira, South Korean Won and the Taiwanese Dollar. The fund attempts to have equal exposure to all the currencies it holds, rebalancing quarterly. Technically, CEW is “actively managed” since it does not follow an index. The manager has discretion to change the currencies included in the fund.

According to a fact sheet from WisdomTree, CEW will not actually own the currencies it tracks. The portfolio is invested in U.S. dollar money-market type instruments combined with foreign currency forward contracts. The result is supposed to be similar to holding money market instruments denominated in those currencies. This approach is definitely more liquid, but it remains to be seen how well it will achieve the objective.

WisdomTree has an interesting study, The Case For Emerging Currencies, that suggests investors may receive both a diversification benefit and yield enhancement through an allocation to this asset class. There is still substantial risk. CEW reduces the risk somewhat by holding a variety of currencies, and is not nearly as speculative as the single-currency ETFs. On the other hand, we have learned in recent months how interconnected the global economy is, so I’m not convinced the diversification will help as much in the future as the backward-looking studies indicate.

For those interested in emerging currency exposure in a convenient package, CEW may prove to be a useful tool. Like all foreign currency investments, it should be approached with caution. WisdomTree has more info about CEW on their web site.

• More on choosing the right ETF

Comments

[utilitus:]

Their BZF initially offered something like conservative local returns of 8%, then suddenly returned only about 3%, which I believe is well below what should have been available with better management. Very low liquidity. WT's a bad shop, imho.

May 07 11:04 AM

[Geoffrey Lordi:]

The issue of currency etfs not returning the local interest rate has been hashed out among contributers many times at SA: no Wisdom Tree currency fund owns direct holdings in the underlying tracked currency. There are other reasons why you should not expect local yield, as well, but this characteristic is one of the more salient ones.

May 07 11:19 AM

[Stock alot:]

Currency etfs will return to local interest rate it is just a matter of people getting into right stocks. look into greenfaucet.com

May 07 01:36 PM

[inflate me:]

Stick with Merk hard currency (MERKX) and its asian currency basket.

Currency is a dangerous game in emerging markets due to potential geopolitical turmoil, especially pronounced right now. And because the currencies' have limited holders, and scope there is little to restrain its state from pursuing a policy of depreciation to service debts, fund stimulus, etc. (althought getting out of the dollar is never a bad idea)

May 08 03:03 AM