I got an early call on Tuesday looking to interview me about the new filing from WisdomTree (WSDT.PK) for currency ETFs. Yawhatnow?
WisdomTree has filed for the following;
- Australian Dollar Fund
- Brazilian Real Fund
- British Pound Fund
- Canadian Dollar Fund
- Chinese Yuan Fund
- Euro Fund
- Indian Rupee Fund
- Japanese Yen Fund
- New Zealand Dollar Fund
- South African Rand Fund
- South Korean Won Fund
- Developing Market Fund
That last one will be a basket that will own ten emerging market currencies, but as I read it I think the ten could change. In the filing, the ten for the Developing Market Fund are Brazil, Chile, China, Czech Republic, Hungary, India, Poland, South Korea, Taiwan and Turkey.
Two big omissions, one more glaring than the other. I am surprised there is no Norwegian krone. Norway is a commodity-based, surplus country which would make for good diversification versus the other funds filed. The other one I would have thought would be there is the Singapore dollar. The Sing dollar is viewed by some, like Jim Rogers and as written up in Barron's over the weekend, as being one of the world's soundest currencies.
I have a theory as to why they might be avoiding this which has to do with the management of the currency by the central bank, the Monetary Authority of Singapore [MAS]. Instead of lowering and raising interest rates, MAS will act in the currency markets in response to changes in the economy. This is different, and perhaps germane to whether or not an ETF is a good idea for their--I mean WisdomTree's--business.
While this is very interesting, there does need to be a mention of how many funds WisdomTree has had in registration for ages that have not listed. According to page three of the IndexUniverse ETF Watch, WisdomTree has 25 other funds filed. To be fair, some other providers have more long standing but unissued filings, but I think the odds of all them listing is remote. Of course, I hope they do all list.
I believe the utility of more foreign currency access, easily obtained, will become more important for U.S.-based investors over the next few years. This is also one of several potential areas that could allow for more sophisticated strategies to evolve or simply be available for retail investors.
Why couldn't someone with a generic target allocation of 70% stocks, 20% fixed income, 10% cash, put 30-40% of their cash into several foreign currencies of their choosing?
I don't mean necessarily trading them, but maybe blending together one surplus currency, one carry trade destination and maybe an emerging market currency to capture real diversification versus the U.S. dollar.
This sort of approach doesn't require the investor to be that right. During times of crisis, you might see surplus currencies do a little better than carry trade/deficit currencies. Owning one of each is diversification. It does not take too much skill to be aware that some commodity-based country is at a different point in its economic cycle, which is again diversification.
Analyzing currencies is not easy, and is probably unfamiliar to a lot of folks, but an argument can be made that there are fewer moving parts to currency analysis than single stock analysis.
If these funds come, some folks will use them incorrectly and hurt themselves. But that should not be your problem--at least hopefully not.