WisdomTree’s New Bundle of Joy: An Active Currency ETF

Currency investors got a present today. WisdomTree announced a new currency bundle,  coming near the end of September. According to their website, the new ETF will carry the symbol CEW under the title The Emerging Currency Fund (CEW). To my knowledge, it will be the first actively managed currency fund on the market.  It will include the following currencies:

• Mexican Peso             
• Polish Zloty
• Brazilian Real             
• Hungarian Forint
• Chilean Peso              
• Turkish Lira
• S. African Rand         
• Chinese Yuan 
• Indian Rupee             
• S. Korean Won

The kicker in this selection, though, is that any of these currencies may be removed and /or replaced with others,  if the fund manager sees it as necessary. This is active management, and it can be good or bad, depending on how lucky manager is, if you believe indexing is the best approach, or how good, if you believe in active management. There are ten currencies in the fund now, but they may elect to go with as few as eight or as many as twelve—depending, again, on the manager.

The expense ratio is to be .55%. And it is equal weighted, which helps in these types of funds since the smaller countries often have to pay higher interest rates when competing with the larger economies. It also helps keep one large country from dominating the holdings. With trade weighting, one big splash can literally drown all the other members. They will rebalance quarterly and use forward currency contracts and high quality U.S. money market instruments to approximate local interest earnings.   Dividends will be paid annually. 

This fund looks similar to Barclays’ Emerging Markets Fund (JEM), although there are differences. JEM has fifteen currencies, while CEW has ten. But, CEW includes China’s yuan which is not in JEM. The following currencies are in JEM but not in WisdomTree’s fund : Argentina, Columbia, Thailand, Indonesia, the Philippines ,and Russia. At this time, the absence of these specific countries is probably better than their presence. All are experiencing hard times in world markets.

The timing of this new ETF could hardly be worse. Of the ten countries, only China, South Africa and India have currencies that are holding up against the onslaught of a rising dollar, and Thailand is near a political revolution. Until the global economies recover from the shock they are experiencing now, it is going to be hard finding much to cheer about for EM currencies or equities.

The chart below shows four currency ETFs over the last several months. SZR is the South African rand, FXM is the Mexican peso, BZF is Brazil’s real, and CYN is the Chinese yuan. The yuan has actually increased over the three month period. The rand has held up well, considering that the U.S. dollar has been rising over this period. Mexico is holding its own, almost, but Brazil has allowed the real to plunge over five percent since mid July.    For most emerging markets, unfortunately, Brazil‘s is the more normal reaction. A large supply of foreign reserves is necessary to support a currency in times of trial, and while Brazil, China and Mexico have such reserves, they do not always elect to use them. But the foreign reserve supplies of  many emerging markets simply will not allow a prolonged defense against a rising dollar.   

Regardless of the timing issue, however, it will be instructive to match up JEM and CEW and see how they fare,  both in assets under management and total returns. They are so close to each other in terms of inception date and goals, it will give anyone interested the ability to test the results of an actively managed fund over an index. Even though they are not exactly alike, they are, in my view, close enough to make comparisons worthwhile. Of course, such a comparison will not be definitive proof one way or the other.  

Both Barclays and WisdomTree have a track record of managing currency exposures. No one knows the future of actively managed currency funds, so the outcome of the competition between these two funds may influence future offerings.  It will be interesting see how it works out.

Disclosure: The author has long positions in JEM, BZF, FXM and UUP.

Comments

[ETF Wanderer:]

I guess, a bit late and bad timing. dollar has already broken long term descending trend lines. Some of the currencies on the list have already started to fall substantially against the dollar.

2008 Sep 12 08:30 PM

[novotny:]

I looked at JEM but seems volume is practically non-existent-- who wants to deal with wide bid/ask spreads?

2008 Sep 14 03:06 AM