WisdomTree's New Currency Income ETFs

WisdomTree has recently unveiled a group of eight Currency Income ETFs. Four of them, tracking foreign money market rates related to the Brazillian Real, the Chinese Yuan, the Indian Rupee, and the Euro, started trading in mid-May on NYSE Arca. ETFs tracking money market rates related to the Japanese Yen and the US dollar came about a week later. Yesterday, 6/25/08, brings the addition of the New Zealand Dollar and the South African Rand.

The eight new ETFs are as follows:

• WisdomTree Dreyfus Brazillian Real Fund (BZF)
• WisdomTree Dreyfus Chinese Yuan Fund (CYB)
• WisdomTree Dreyfus Euro Fund (EU)
• WisdomTree Dreyfus Indian Rupee Fund (ICN)
• WisdomTree Dreyfus Japanese Yen Fund (JYF)
• WisdomTree Dreyfus New Zealand Dollar Fund (BNZ)
• WisdomTree Dreyfus South African Rand Fund (SZR)
• WisdomTree Dreyfus US Current Income Fund (USY)

The US fund has an expense ratio of 0.25%. The Euro and Yen funds have expense ratios of 0.35%, and the rest have expense ratios of 0.45%.

All the funds are actively managed. They seek to preserve capital and maintain liquidity while providing current income by investing in short term instruments (no longer than 90 days), including forward currency contracts, government bonds, bank time deposits, corporate debt, and commercial paper, associated with the specific regions they track.

The funds tracking the money market rates of emerging markets, like Brazil and India, hold a combination of foreign and US instruments. WisdomTree's reason for this is that money market instruments in developing markets are less liquid and accessible to foreign investors.

While every fund's holdings are subject to change without notice, here is a sample of what you may find in the Real Fund's holdings, which is similar to the other Currency Income funds tracking emerging market money market rates:

1. Currency contracts for the Real, at various different prices (of course, the fund tracking the Indian Rupee, for example, has currency contracts for the Rupee instead of the Real).
2. Government bonds (FHLB DN)
3. Various short term commercial paper from banks, like General Electric Capital Corporation, UBS Finance, Royal Bank of Scotland, Danske Corporation, and Bank of America, among many others.

The funds tracking more mature markets have combinations of bank time deposits and foreign bonds. For example, the Euro fund has time deposits at various different rates with such banks as Barclays, UBS, and Citibank. Bonds represent France, Germany, and the Netherlands.

WisdomTree advertises the funds as providing investors with access to the higher yields available in foreign markets and greater portfolio diversification, as money market securities around the world have in the past shown low correlation to domestic asset classes.

The US fund is supposed to pay a monthly dividend. While WisdomTree does not state so explicitly, it appears the other funds will have monthly distributions as well. Although they seek to track money market rates, the ETFs will not have stable share prices. That is, they will behave like ETFs and not like money market funds.

I am particularly interested in the Real and Yuan funds, as both currencies are expected to appreciate against the US dollar in the future.

That said, I would wait before buying any of these ETFs. My reasons are:

1. Their yields are as yet unknown.
2. Being less than a month old, the ETFs are very thinly traded. For example, EU's average volume is only slightly over 7,000 shares per day. The Real Fund is more popular, but still thinly traded with an average volume of 108,000 shares per day over the last three months.
3. We don't know yet if the funds will do what they're supposed to. This is especially true of those funds (tracking emerging markets) that hold some instruments not associated with the regions they track.

Another way to put this is, since they're actively managed and don't just follow an index, the ETFs NAVs will be affected by the fund managers' performance. I have been unable to find any information about what person or persons manage the ETFs.

Comments

[GeoffreyLordi]

As of a few weeks ago, CYB and BZF were slated to distribute on a yearly schedule...The Rand and NZ Dollar might be the same...

[User 86999]

One sticky issue with currencies is the taxation nightmare generated by the year-end K-1 form. Many people have been shocked to see that facet of the lure these currencies have. It would be nice to cover this important aspect when exploring a particular currency fund. As I understand it, not all currency funds generate a K-1, which makes it even worse, because now you have to keep tabs on which one does and which one does not. There is a lot of discussion on Yahoo Finance.

[davidp]

As of today (6/27/08) the prospectus clear states the dividend paying frequency of each fund. US is monthly, Euro/Yen is quarterly (ie, the ones that actually hold foreign bonds), the remainder are annually.

--Dave