Three points about the Rydex Euro Currency Trust (ticker: FXE), and one comment:
- The tax treatement is worse than for equity ETFs. Current US Federal tax rules differentiate between long-term and short-term capital gains. But the tax treatment for the new currency ETF and other commodity ETFs, such as the gold ETFs GLD and IAU, is inferior. There's no 15% long-term capital gains rate.
- The expense ratio is relatively high, but still lower than rates individuals would have to pay for buying and selling currencies. FXE charges an annual expense ratio of 0.4%, which is deducted from the funds' interest payments.
- Interest rates paid on the fund might not be optimal. John Spense points out: "JPMorgan Chase will maintain two euro-denominated accounts in London: a primary account which will earn interest, and a secondary account which will not earn interest. JPMorgan will not be paid a fee for its services to the ETF. Instead, "it will generate income or loss based on its ability to earn a 'spread' or 'margin' over the interest it pays to the Trust by using the Trust's euro to make loans or in other banking operations," according to the prospectus. Therefore, investors "should not expect that the Trust will be paid the best available interest rate at any time or over time."
Comment: There's one situation in which high expense ratios work in an investor's favor -- when you short an ETF. In that case, shorting a high-expense ETF is better than shorting the underlying asset class because the expenses charged to the fund are deducted from the value of the holdings and therefore work in your favor. However, you need to also bear in mind the cost of the transaction commission and the spread on buying and selling the ETF.
Even given transaction costs and spreads, the new Euro Currency ETF may well turn out to be the best way to short the euro for those who want to do so. For retail investors, however, the issue is whether they will be able to do so...
- Other articles about the Rydex Euro Currency Trust ETF, FXE.
- Articles about the proposed silver ETF, SLV.
- Articles about the gold ETFs, GLD and IAU.
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