Barclays Launches a Carry-Trade Currency ETN

By Murray Coleman

Barclays Global Investors [BGI] launched the iPath Optimized Currency Carry Exchange Traded Note (ICI). "We've got three single currency iPaths we launched last year," said Noel Archard, BGI's head of U.S. iShares product development. "The advisor feedback we got was that they'd like to be able to invest in currency baskets as well. So this takes pretty standard institutional carry trade strategies and looks at the G-10 currencies."

With an expense ratio of 0.65% per year, ICI tracks the Barclays Intelligent Carry Index. That benchmark uses quantitative modeling to capture the returns of the highest-yielding currencies from G-10 nations. The methodology results in the portfolio taking long positions on some currencies and shorting in lower-yielding currencies.

But it doesn't have any set number of long and short currencies it'll take position in at any given time. As of February, the ETN was shorting the U.S. dollar, the Swiss franc, the Swedish krona and the Canadian dollar. It was long the six other currencies in its basket. Those were: the euro, the yen, the British pound sterling, the Australian dollar, the New Zealand dollar and the Norwegian krone.

"There is some risk involved with a currency ETN," Archard said. "But ICI has a predefined methodology using a mean variance optimization strategy to keep volatility within about a 5% range."

• More on choosing the right ETF

Comments

[Lisa]

I wonder whether this is the worse timing to launch a carry trade ETF or ETN. The dollar has fallen so much, that despite the carry trade with the Euro, you have to think that the dollar could bounce sharply.

[GryCCB]

I agree. I'm looking for a 3 to 6 month dollar bounce. Wonder how quickly this ETN can move to currancy moves? A pretty volatile arena to play. But I've done well in FXE & FXA in the last year. Looking to buy some UUP soon if it looks right. This (ICI) could be interesting.

[Vladimir Senkov]

I found it interesting to know that the ETN is long on the yen. This is what most carry traders where short on for quite some time now. I think this one might have a chance when yen continues to appreciate due to . . . carry trade continuing to unwind. I'd also like to believe that USD will eventually bounce, but i'm afraid 3-6 months is far too optimistic. Perhaps in a year or two. There must be a bounce, eventually. Question is, from where? from 2 USD per euro, bounce back to 1.9?

[User 170347]

In reading about this ETN, it appears it does not pay out (nor accrue) any interest. Isn't one of the secondary benefits of the carry trade, after currency gains, that the high yielding currencies pay excess cash on top of what is required for the borrow? Seems like a good deal for Barclays if they collect a 0.65% fee plus the interest differential; or am I missing something?

[rainman]

I am totally confused and not convinced by the mentioned approach.

[buckmaker]

what's confusing? The only thing that seems to be a little bit risky is shorting the lower yielding currencies. The Swiss is a perpetually low yield because they and the rest of the world value it as stable, certainly something to consider when looking for appreciating currency. High rates do not always mean appreciation. Look at Germany after WWI

[sbenard]

How is this ETF different/better than the Powershaes Currency Harvest Fund (ticker- DBV)? DBV has been a relatively poor performer of late -- down nearly 10% in the past month. When the Yen was dropping continuously, DBV (and the carry trade) performed well. Thus, perhaps this fund could be considered an anti-Yen trade? Thoughts anyone?

[AugC]

Here's why I waited for this one instead of jumping for DPV, the Powershares carry trade product.
1. slightly lower expense ratio (.65 vs .75)
2. more complicated methodology- the DPV will always be short 3 currencies and long 3 currencies, and it will always be by the same amount; ICI plays all 10 currencies, and it plays all 10 a different amount
3. ICI reconstitutes monthly, while DPV reconstitutes quarterly

To answer the question about interest, the interest accrued is reflected in the value of the note. My understanding is that Barclay's does not keep the interest for itself.