Ray Hendon

New Currency Bundle from WisdomTree

I think a good case can be made for a trade-weighted allocation, but when you go with a weighting scheme that assigns eights by sales, capitalization, etc., then you open yourself up to bubble trouble. When a trade bubble developes, as they do periodically, then you are overweighting what is likely to be an overvalued currency. Furthermore, the favored member will croud out other currencies that may, over the long run, be a better buy.

But, the biggest reason they use an equal weighting system is probably the administrative costs are low, and rebalancing is not a traumatic event.

Thanks for the comment.

Ray

A Peek Under the Wisdom Tree

John: I'm not sure I can provide you with the answer you need, but here's the way I understand their structure. First, only a few of their currency ETFs hold the actual currency. In all emerging markets they buy non-deliverable forward contracts or currency swaps if multiple currencies are involved. In both cases, an interest rate is built in to the contract, which is part of the forward market mechanism.

For the currencies they own directly (Euro or yen, e.g.) they use the currency holdings to invest in local short-term, high quality financial instruments, that on maturity, pay interest.

They may collateralize their forward contracts with U.S. Treasury obligations, and will earn interest on the holdings in addition to that paid on the forward contracts.

It is my understanding that all interest earnings are retained for the shareholders and are added to the net asset value as they accrue. This provision, I believe, is part of the requirements of the Investment Company Act of 1940 which regulates mutual funds and most ETFs.

Best, wishes,

Ray

A Peek Under the Wisdom Tree

Indexor: Here is the official reply from WisdomTree:

Income distributions by the Funds, including distributions of short-term capital gains, will be taxed as ordinary income. Capital gain distributions by the Funds, if any, will be taxed as long-term capital gains. Gains from sales of fund shares will generally be taxed as capital gains in accordance with the investor's holding period. Shareholders should refer to the applicable WisdomTree Dreyfus Currency Income ETF prospectus for important tax information and should consult their tax advisers regarding their personal tax situation.

Hope this helps.

Ray

A Peek Under the Wisdom Tree

I discussed the tax issue with Mr. Lavine, and he provided me with an answer that I can't recall with enough specificity to do you any good. I am going to submit your question to WisdomTree for their official response. As soon as I get it, I'll post it here.

Thanks for the comments and question.

Ray

A Peek Under the Wisdom Tree

Thanks for your comments, Brian. You do have a good point about the potential relationship between hot money and its effects on currency prices, but I am not signing on to the scenario you outline about inflows and interest rates. I think there are some flaws in the plan, but I'm not going to make a counter-argument now. It would take a lot of space and time, but this is something we might revisit at another time.

I will make one note, however. I think the most important variable in predicting the interest rate effect is not the relative rate of interest, i.e., high or low, but the direction of expected change. If interest rates are expected to rise and do, this would devastate longer-term bond prices, regardless of where they start from. It would, of course, help bond prices if they were expected to fall and did, in fact. fall.

Also, emerging markets do not support a sufficiently liquid high-quality credit market, so all of the ETFs that specialize in this segment of the market use forward contracts as their primary assets, and they depend on the roll for their interest earnings. You can only extend this out so far, and contracting with an exceptionally long roll period places a huge burden on the fund's net asset value. What if thery're wrong? I don't know of any that want to take on this type of risk.

You might consider contacting your local WisdomTree rep with your suggestion about venturing out the yield curve. From what I have learned from Mr. Lavine and from his counterpart at Barclays, they listen to their advisors clients. You might start a revolution in the business. (:~)

Thanks again for your input.

Best wishes,
Ray