ETF Update: Currency ETFs, Building A Better ETF, SEC Applications

Currency ETFs

Currency ETFs are gaining popularity as the dollar is weakening. Performance is up to par and they pay dividends based on foreign interest rates. Dan Caplinger for The Motley Fool says currency ETFs based on the value of other country's currencies have made it easier for investors to bet on the direction of the dollar. Take CurrencyShares for example:

• CurrencyShares Euro Trust (FXE) Each share of this represents 100 euro.
• CurrencyShares Japanese Yen Trust (FXY) holds 10,000 yen per shares.

By deciding how many shares to buy, the investor can control how much exposure they want to foreign exchange. Dividends are also paid out, as in the CurrencyShares Australian Dollar Trust (FXA) which pays 6.13%; CurrencyShares British Pound Trust (FXB) offers 5.43%. FXE pays out 3.77%.

Building A Better ETF

Is it possible to build a better ETF with indexes? WisdomTree is working to do just that with their ETF family that is based on fundamental indexes rather than the traditional market cap-weighted method.

WisdomTree Pacific ex-Japan Total Dividend Fund (DND) uses the MSCI Pacific ex-Japan Index as its benchmark. These two indexes use different guidelines in determining which companies to include. The MSCI is the traditional market cap-weighted method, favoring widely known, high-value companies, explains Saibel Saha for The Motley Fool.

The WisdomTree index includes companies only paying regular cash dividends. The focus is on earnings and companies paying hard cash to investors on an annual basis. Mature, slow-growing companies are usually the types that fit the criteria. DND goes after the growth and good business fundamentals.

Since its inception, DND has returned 87%, while the MSCI index returned 79% in the same period. The WisdomTree ETFs are just over a year old, so whether DND can continue to outperform its benchmark remains to be seen. As for cost and returns, it had a winning first year.

SEC Applications

The SEC Division of Investment Management has indicated that ETFs remain a high priority according to John McGuire, partner with Morgan, Lewis and Bockius in Washington, DC.

Specifically, the division will continue to make the processing of ETF exemptive applications a priority. In addition, there are plans to propose an exemptive rule that, if adopted, would allow index-based ETFs no need for an exemptive order.

Finally, there is hope to process an exemptive order to permit an actively managed ETF in the next few months. In a nutshell, it appears the SEC intends to make the ETF application process easier.