Ray Hendon

Currency ETFs: Consider the Commissions

John: My experience with mexican peso, using CitiTrade was different than yours. The spread was over 100 pips--I was selling the us/mx short. And, it took hours after the order was made to get it executed.

Also, there is the rather important issue of leverage. The investors I work with would be lost handling the complexities of leverage and shorting pairs. For the type of investing they do with currencies, ETFs are ok.

I don't think traders would ever buy ETFs. It's not in their interest--I agree with you on that. But I like them for the type of investing I do. Bundles for diversity, for example.

Best wishes to you , too. And make a bundle.

Ray

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...

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

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.