Rydex Euro Currency ETF Fees Seem Reasonable (ETF: FXE)

A number of bloggers have risen to the challenge in the past week and posted great commentary on the new Rydex Euro currency ETF (symbol: FXE). The coverage on SeekingAlpha has been excellent, with must-read posts by Roger Nusbaum (here and here) and SA publisher David Jackson. By contrast, the coverage over at MarketWatch did not really go beyond a simple rephrasing of the Rydex press release.

Both bloggers and journalists have made quite a fuss about a single sentence in the fund's prospectus, which reads as follows:

[JPMorgan] 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.

That looks a lot like some kind of a hidden fee, and commentators have been right to draw attention to it. But my read of the prospectus is that this is a relatively innocuous feature of the fund structure and not something that should dissuade investors. Note that Rydex discloses exactly what the interest rate paid on the fund will be: EONIA less 27 basis points for JPM and less another 40 basis points in the form of Rydex’s expense ratio = 1.65% based on yesterday’s Euro-denominated interbank rates. By contrast, Everbank’s 12-month Euro CD is yielding only 1.00%. (In both cases, currency translation costs are built in to these rates.)

Is JPM getting a good deal out of this? Absolutely: they are effectively taking on a long-term €1.7 billion ($2+ billion) loan at an interest rate of less than Eurozone overnight bank rates, which are themselves already well below JPM’s firm-wide borrowing costs. But this does not mean retail investors who buy FXE are being taken advantage of. Compared to the small investor alternatives like opening a Euro account at Everbank, the yield on FXE is still very competitive.

Does that mean small investors who want to speculate on the Euro should rush out and buy FXE? I’ll have more to say in a future post.

Comments

[Internet2k4:]

On my first look into this, it appears to me the relevant comparator would be opening an account with an FX broker and simply buying Euros whenever and holding for however long - as I understand FXE: 1) JPM takes a very hefty MER of 1.65%, apparently because it will be actively moving in and out of the Euro 2) JPM takes the "spread" on each trade, which would be the only "fee" taken by an ordinary FX broker, and 3) to buy FXE units I have to pay my own brokerage its trading fee. I look forward to more on this instrument.

2005 Dec 23 04:22 PM