Ray Hendon

Tough Times for ETF and ETN Providers

Any ETF that is registered under The Investment Company Act of 1940 is free from any of the shenanigans that the banking industry and others used to fleece investors. These trusts are rigorously regulated and, as importantly, their monies held and securities purchased must be held by separate companies under highly controlled conditions. All of WisdomTree's currency assets are registered under the provision of this act, and, I believe, so are PowerShares. You might the prospectuses for more details on this provision.

ETNs are a different matter. With these instruments the safety is dependent entirely on the credit worthiness of the ETN provider at the time the fund matures. Personally, I do not like the ETN format. It has so many things wrong about it that I can't bring myself or any of my clients to risk a penny in their trust. Not everyone agrees with me harsh assessment, but I stand by it. Why take a credit risk that is added to the market risks you are already taking?

Best wishes,

Ray

The G-20 Sings a Song of Sixpence

I suggest you do a little more research on J.M. Keynes, including his role at the Bretton Woods Conference, and his place in establishing macro-economic theory. If you look at any elementary economic text book for the last forty years, Keynes' theories and policy recommendations have dominated about half the volume.

I also reject any bias because I use to teach economics and finance in college. No one deserves to be assigned either a liberal or conservative label just because they chose that profession. Economic theory does not come in flavors of liberal or conservative. It comes as a study in trade-offs between competing goals with limited resources.

If you want some current relevance of Keynes, study his liquidity trap theory, which thoroughly explains our current situation of trying to use monetary policy to get out of a serious economic downturn.

Lastly, I did not expect any great things from the meeting of this week. I suggest you re-read what I wrote. I think the next meeting, in 100 days or so will be the more meaty of the two. All participants need some tome to study their options, and there will be some fundamental differences about the role of regulation, size of stimulus and IMF participation.

I also disagree with your assessment of the IMF over the years. Check out the hundreds of countries what have borrowed from the IMF and taken their advice on how to straighten out their economies. I think once you are more familiar with the facts of the situation, you will draw a different conclusion.

Everyone of good will wants the situation to get better. I have no particular biases that cannot be broken if it would help. I am not sure you understand the seriousness of the crisis we face. The wheels have come of the world's economies. Major stuff is needed to put them back on. Clinging to ignorance and prejudice will not do the job.

Also, to assign to Keynes the problems the UK has had since WWII is rather simplistic and, simply, wrong. He was a private economist and currency trader. The British Empire was at the end of it life because of a host of factors, none of which were under the power of J.M Keynes.

Best wishes,

Ray

The G-20 Sings a Song of Sixpence

The major contributors to an expanded IMF fund would be Europe, America, Japan and Saudia Arabia. All these nations have good supplies of foreign reserves, and could make contributions in the hundreds of billions of dollars if needed.

I agree with you that the Bush Administration has used the IMF and the World Bank as dumping grounds for washed up hacks. But it hasn't always been that way, and it will not be in the future, at least is the G-20 members gave their way. Also, some of the past Administrations have actually put good people in these positions.

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 Counter-Cyclicality

elobrate what?

The Burden of the Carry Trade

Hi, Mark

I don't know your situation, but as a general idea I like the ETFs of Rydex and Wisdom Tree. The specific ones to buy will depend on the strategy you wish to follow. The carry trade options are limited to about five, and a value strategy is even more limited. I have had good success with both the FXM and BZF funds, but I also like Australia (FXA) as a value play and as a carry trade prospect. China (CYB)) is probably the best value play, in my view, but CYB doesn't hold the yuan, it buys forward contracts, and the interest earnings are unattractive.

For strategy funds, I prefer DBV over ICI simply because I prefer the Deutsche Bank Index over the Morgan Stanley Index--but I have no way of knowing which would be better over the years. Right now, DBV has outperformed ICI by a small margin, but both are young funds.

I have also read of strong recommendations on the Swiss Franc (FXF), but I would encourage you to do some research on this currency--it has a long record of good stability and a haven in the storm type of play, but I don't know what to expect of it as a growth prospect.

I am a long term investor, so I don't look for fast turnover. You may be of a different temperment, so I can't give you advice or opinion of much value.

Good luck.

Ray

Strategies for Currency Investors

Thank you all for your generous comments. I'll have another post within a week or so on the details of executing a carry trade strategy. User 86999: I am not a tax expert, so be careful in placing too much credibility in my views on the K-1 issue. As far as I know, K-1s are used by Trusts, and is their way of passing on capital gains to their owners--you. While the Rydex fund (FXM) is a trust, they do not engage in futures transactions--they own mexican pesos outright. So, their exposure to capital gains is small. Those trusts that engage in forward contracts, however, do have a large exposure since they must turn over their contracts on a periodic basic.
ikkyu, thank you for the infor on OANDA. I was not aware of this broker, and what I have found so far is good.

Six Ways to Trade Foreign Currencies

My mistake. The symbol is BZF.

Six Ways to Trade Foreign Currencies

BXF is the trading symbol. It has been actively trading since May 14, 08.

Six Ways to Trade Foreign Currencies

Sam, I haven't made any specific recommendations about individual ETFs or ETNs, except that I own two. The reason I don't make specific recommendations for an investor is that what they buy must depend on what their current exposure to currencies are, among other considerations. For example, granger, in the last comment, has exposure to several European currencies through bond holdings. So, he would not need to have those currency ETFs in his portfolio unless we was shorting them to hedge his bond bets. I simply do not believe that every investor needs to have currency exposure, depending on their attitude about and ability to handle risks.

DBV is a strategy ETF, and I will cover the strategy possibilities in my next post. Note, however, its high expense ratio. Any strategy will come at a cost, so it is a personal questions as to whether the cost is worth it.

Also, I think ETFs and ETNs do properly reflect the small currency movements on a daily basis, depending on how much they trade. It may be some days before the latest price movements are reflected in NAV if the ETF is not trading. But, over the long run, price movements in the currency will be captured.

Granger, good question about proper allocations of currencies to a portfolio. This is not an area that has gained much attention from financial advisors, for currencies as an asset class have not reached critical mass yet, in my opinion. I think that with the new offerings, however, advisors will begin looking more closely at this area.

Six Ways to Trade Foreign Currencies

The expense ratios are important, but with currency funds they are far from the complete story. Also check the bid/ask spreads among the various vendors and the spread between the interest earned and interest paid. Rydex and Wisdom Tree have the lowest ERs, although Elements are also about the same as Rydex. Van Eck is the highest, with a .55% ER. But, recall that ETNs all have futures to buy, and the costs of futures are not included in the overall expense ratio.

In terms of tax implications, the interest earned on ETFs and ETNs is taxable for the year in which it is either paid or declared. But, with ETFs, you at least get the dividends. With ETNs they are added to the total value of your investment but are not paid our. You must sell the shares to capture them, and you must pay the tax on them even though they are not paid out. To me, this gives an edge to ETFs.

Currency Investing: Making Money on Money

Thanks, Richard, for catching my error. I have submitted a correction to the editors, but it may take some time to get it put in place.

My apology for the error.

Ray