Ray Hendon

Currency ETFs: Consider the Commissions

I can think of several important reasons to favor the ETF or ETN format to that of a currency broker. First, an exchange traded product does not require the buyer to short a currency. While you are using dollars, for example, you don't have to short them. Shorting half of a pair doubles the risk for an investor, and for the carry trade, the buyer prefers that the two currencies remain constant so the interest earnings can be fully enjoyed.

Secondly, on pairs that are not the big six, the spread with a broker is huge. Try buying the Mexican peso (which you have to buy paired with a shorted dollar) from a broker. The spreads are over a hundred times that of the $/Euro. Also, most of the forex trading platforms I checked out do not have more than 30 or 40 pairs, and fully a third of the pairs are denominated in either dollars, euros or yen.

Thirdly, if one opens a forex account the account must be funded. That means selling some of your other assets and paying taxes on the gains--which may be inconvenient at the time. This is especially bothersome if you have your money in a tax protected account. In that case, you must jump through a number of hoops just to get your hands on your money, and you may lose some of the principle because of early withdrawal.

I am not putting down forex trading--although I do not engage in it myself. I am advocating a less frenetic way of investing in currencies, either carry trade or value investing, without having to devote your entire life to learning forex trading--and you must admit it is a lot to learn (assuming you want to be successful--and even then, the odds are against you).

Finally, you can get various bundles of currencies in exchange traded products, which would be difficult to duplicate in a forex account. Diversity is much easier to achieve in the ETF, ETN products. There are some exceptions, I see lately, coming from the forex brokers. I am glad to see them begin offering bundles or other strategy accounts that make forex investing more accessible to ordinary investors.

For traders I can see the advantage of a forex account. But for a more casual investor, who still wants to participate in the benefits that currencies bring to a portfolio, I think an exchange traded product is a good way to proceed. Of course, this is just an opinion, and I may be entirely wrong.

Best wishes,

Ray

Currency ETFs: Consider the Commissions

For accounts that allow free ETF trades, see: seekingalpha.com/artic...

Brazilian Real: Update to the Downside

With respect to the prospects for EWZ I would encourage you to split your views into the short run and the long run. If your horizon is short, say, a year or less, then EWZ is not a strong prospect for gain. A 10% gain for Brazil is not out of the question; their recent gains have far exceeded that amount. But you do need to extend your horizon some to be more certain of coming out ahead.

Equity markets are in a transition stage, especially in the developing world, where there have been huge gains over the last few years. They will pay back some of their gains as the effects of world inflation and slowing Europe and America take their toll. But Brazil is in such a good position to profit from the commodities boom, that they must eventually prosper more than most others. They have so far to go, and for the first time in their history, they have the infrastructure in place to make something out of it.

But they are strictly a longer term play.
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Four New Currency ETFs from Rydex

I received an email from a Rydex representative today that the expense ratio of their currency ETFs is .4%, and they though the 45 bp I mentioned as the bank spread on interest earned vs. what is paid was an allusion to the ER. So, just to be clear. The ER is .4%, and the interest spread from earned to paid is .45%.

Brazilian Real: Update to the Downside

I still like their equity ETF (EWZ). There is often a disconnect between a currency and equities, and I feel much stronger about the economy of Brazil than I do their currency, at least over the next months. The currency was simply oversubscribed by the carry trade hot money. EWZ has taken its hits lately, as all emerging markets have, but I think this will pass once commodity prices stabilize and they do some test drilling in their new oil fields off shore. But, it's still risky for either investment.

Currencies: Dead Cats and Yapping Dogs

Muddling Investor: You have the right idea to dig into your own research. I am sticking with Mexico and Brazil, but I believe both these currencies may be in for a rough patch ahead. Both countries have slid into trade deficits, and, in my view, Brazil is likely to allow the real to slide vs. the dollar in order to help it correct its deficit. This will probably mean giving up some points of its gain over the last few years. But, I don't think the carry trade investor will lose because the interest rate there is so high.

elwin45: I must say the economic scenario you lay out is beyond my ability to follow. I don't know what world you are being real about, but it isn't the one I live in. Generally, an increased supply of a currency, such as U.S trourist in China spending for motels, food and taxis, will put downward pressure on their currency--not upward. And, in my world, nations holding bad debt denominated in dollars will not increase their purchases of dollars because of it. I actually don't see much relationship between those two items, other than a tendency to dump the debt and recycle the proceeds into other investments--assuming something is left to recycle. Whether the recycled purchases are in dollars or not will depend on the interest spreads and currency spreads at the time. I'll give you credit for original thinking, but I just don't follow it. Good luck.

ikkyu: I always enjoy your perspective, and I appreciate your comments. As far as interest being the only attraction of the carry trade, I think you are speaking of motive, which is highly personal, and I am speaking of a strategy. I tend to be somewhat of a purist when dealing with strategies and theories, and try to stay focused on the driving force behind it. But, you are correct that holding currency pairs involves risks, and they may be substantial, in that there is likely to be some appreciation/depreciat... between them. So no carry trader can ignore the prospects of having a profit or loss from the transaction. In fact, if there is a big interest rate differential between two currencies, that is reason enough to expect there to be some change in their currency relationships. The carry trade is a temporary opportunity that requires an exit strategy to be successful.

As far as JEM and DBV being correlated, that may prove to be true over some time period, but I think that the developed economices and emerging markets do follow a different drummer. So, I don't look for a strong sympathy between them. But, I'll keep an eye on this possibility.

Best wishes,

Ray

Currencies: Dead Cats and Yapping Dogs

surgcare: I consider a currency strong if it is going up or at least holding its own against other majors. I consider it weak if it cannot hold its own, as the dollar did not do for the last sever or so years. I feel the dollar is undervalued now, not because of any great fiscal restraint or wisdom coming from our political learers, but simply on the what you get when you pay for something in America with most any other currency. It has been my experience that currencies almost always overshoot the mark and become under or over valued briefly before a correction set in. I think the dollar is there now. But, of course, I may be well off the mark on this estimation.

As far as Rome, I guess we, and millions of others could discuss the causes of Rome's fall until the end of time. From my limited knowledge of its history, I think Rome was ultimately a moral failure: it never rose above slavery, and it lost the support of the general poplulation over the course of centuries of warfare. In the end, it seems, there was no one left to defend it from more aggressive peoples clammoring to take it.

Thanks for the comments.

droskoph, thanks for the compliment. In reading it again, today, I feel I could have said about the same thing with many fewer words, but I almost always feel that way when its over. I wasn't targeting any one in particular about the Rome comments. It's a popular thing to do.

Best wishes,

Ray

Carrying the Dollar Upstream

Brian, thanks for the comments. Your idea may have merit, but I can see one downside. As long as interest rates go down with the currency, your plan would be great. But, if interest rates are going up while the currency is depreciating, then you have the worst of both worlds. Remember that the price change in a bond is equal to its average duration times the negative of the price change. So, 3% rise in interest rates would be 60% drop in value of the bond if it was a twenty year average duration. This would devastate investors of the currency.

But, there may be some optimal mix of short and intermediate term bonds that could be held that would cut the worst losses and still make a good positive in the cases when interest rates were falling.

I hope Mr. El-Asner reads your commets--maybe it will give him a good idea.

Best Wishes,

Ray

Stagflation and the Limits of Growth

I apprecate all the coments. I can see that there has already been much thought on this subject. A couple of specifics: bbzz24: don't assign the propensities of the gulf countries to the rest of the world. This part of the Middleast is, essentially, a one trick poney. They have oil, more oil, and, oil. Plus the distribution of inome from their oil deposints is not even. The reigning families control most of it, and the rest get little. This doesn't give the majority of the population much room to become entreprneurs. The can be expectd to continue producing oil because that is all they have.

But in China, India and other developing nations, it's an entirely different story. They have resources beyond a single commodity, and they have a histoy of exploiting these advantages. So, I think that the response of the rest of the developing world will be substantially different than that of Arabia.

There is not doubt in my mind that the future will be more competitive that it has been in the past. We must work harder to stay in the same place. But, America has such a great advantge in resources and experience, and in the willingness of its people to put their shoulders to the wheel, that I think we will do well in the competition. While we have been guilty of being lazy and fat, we are much more than that. Just watch and wait. You'll see.

Best wishes,

Ray

Stagflation and the Limits of Growth

I don't have a handle on the timeframe, at least in terms of competion. In economic proceses, things are rarely completed, anyway. Before one adjustmen is fully made, others begin. But, I don't think the U.S. will suffer as long as you think. With prices so high, the incentives to produce are high, so I think there will be some heroic efforts made to cash in on them--perhaps this will shorten the process.

But I agree with the implications of flatman and fabian-the pie will grow, but our share will not be as big as it once was. This doesn't have to be such bad news, however. I think the pie wll grow a lot, given the incentives. In that case, a smaller share of a bigger pie may leave us in good shape--depending on how much it grows and how big our share turns out to be.

Best wishes,

Ray

Finding Your Comfort Zone with Currency Investing

Hi, Les,
I am not aware of much research on currency ETFs. They are probably too new to attract much attention from analysts. However, even if they were I would be skeptical of their opinions. I'm equally skeptical of my own. No one can do much of a reliable prediction in this type of market, in my opinion. Things can turn on a dime at the slightest quiver of a wind from any direction.

I have read a book on trading currencies, and I thought it was fairly good. Remember, all we have are opinions, and currency trading (vs. investing) is not necessairly a teachable subject. The book I read is : Getting Started in Currency Trading by Michael Duane Archer. It is probably out of print, but I found a copy at Amazon. Also, there are a couple of authors who contribute to Seeking Alpha. Chen and Lieu (if my spelling is correct) are two you might check on.

I would encourage you to approach this subject with the greatest caution, and consider, instead, currency investing--something like the carry trade. Trading is fast paced and will eat you up fast if you are not exceptionally able to cope with it. Few are!

Good luck.

Ray0

Finding Your Comfort Zone with Currency Investing

I haven't been following CNY, since I detest most ETNs, and your report reaffirms my view on this instrument. I believe CYN is one of the ETNs that doesn't pay dividends, so the interest income, if any (and the Chinese Yuan is the last place I would go to earn interest) you will see only to the extent their forward contracts include any such accumulation. Apparently they are not. The reason for this, I believe, is that China pays less than 1% on their foreign deposits, so that precludes leaving any money there. But, even worse,the yuan is mostly traded through forward contracts which the providers "hope" will include some interest earnings. But, you can't prove that by me--especially with most ETNs.

Also, even Wisdom Tree, whose yuan fund I like more than Van Eck's, only pays dividends on an annual basis--if I recall this correctly. China is not a good place to play the carry trade.

I thank you for your post. Our readers need to know how these differences will affect them and their investments.

Best wishes,

Ray

Finding Your Comfort Zone with Currency Investing

For ETFs the providers list their assets under management on a daily basis. For ETNs they list the indicative value, which is the last price per share times the number of shares outstanding.

Best wishes,

Ray

Currency Bundles Pegged to the Dollar

PS: It is, of course, possible to earn a negative roll when the interest rate where the money is borrowed is higher than that in the country in which the currency is purchased.

RH

Currency Bundles Pegged to the Dollar

Hi, Brain. Thanks for the comment.
The local currency interest rate is, as you have discovered, difficult to pin down. This is especially true when forward contracts are used as opposed to holding the currency and buying local short-term interest bearing instruments with it. I like the second approach--interest earnings are more predictible using this method.

With respect to China, as of now, the yuan cannot be held by foreigners and deposited in China, so there is no choice but to use the forward markets in other countries. Plus, even if you could hold the yuan directly, China severely restricts where foreign monies can be deposited. For Americans, and probably every other foreigner, they are held in exceptionally low interest-bearing accounts. This is an oddity (given their high inflation rate), but China is full of these kinds of restrictions and odd-ball policies. They are new to the internation financal system, and are warry of it.

So, the Chinese authorities keep a tight reign on their financial system (separate share classes, restricted bank accounts, etc.), and it will be a long time before they join the western world and allow more or less full access to all their financial instruments.

In the meantime, I stay out of their currency ownership. I am too uncomfortable with all their restriction and their poor prospects for the carry trade. If you want to take on the yuan as a value play, you could use the Singapore dollar as a proxy, but I don't know the interest rates forecast for this currency, and forecasting what Singapore will do in the future is beyond my abilities.

Best wishes,

Ray