The Case For Renminbi And FXCH

December 20, 2011

FXCH seems like it might be the best-kept secret in ETF land. It's time to get the word out.

When Rydex SGI filed for a new renminbi ETF in June, I wrote a blog out of excitement for this groundbreaking product.

Now that the CurrencyShares Chinese Renminbi Trust (NYSEArca: FXCH) is trading, I'm a little surprised at the lack of investor reception it's received. Two months after launch, it only trades a few hundred shares a day, and has just $7.8 million in assets.

There may be several reasons why FXCH is off to a slow start. But first, I think it's important to cover some important structural differences between FXCH and the other renminbi currency funds, which investors might be overlooking.

For starters, FXCH is the first currency exchange-traded product to provide investors with direct exposure to the renminbi, without using derivatives. Like all other CurrencyShares products, FXCH's shares are backed by the underlying currency, held in deposit accounts. This structure is similar to the popular SPDR Gold Shares (NYSEArca: GLD) physical bullion fund.

Meanwhile, the WisdomTree Dreyfus Chinese Yuan Fund (NYSE Arca: CYB) and the Market Vectors Chinese Renminbi ETN (NYSE Arca: CNY) mostly use nondeliverable forward currency contracts to gain exposure to the renminbi.

The issue that CYB and CNY have run into is that with a slow and steadily appreciating currency like the renminbi, future appreciation is already priced into the forward contracts. This means that to make meaningful gains, the renminbi has to appreciate faster than the forward markets expect.

This has muted the returns in both CYB and CNY since the summer of 2010, when Chinese authorities relaxed their peg to the dollar for the second time in six years. While the renminbi has appreciated roughly 7 percent against the dollar since last summer, CYB and CNY returned roughly 3 percent and 2 percent, respectively.



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