iShares Plans Active Currency ETFs

August 09, 2012

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The ETF giant plans to enter the currency ETF space with a splash.

iShares, the largest ETF provider in the world, is looking to add actively managed currency ETFs to its vast roster of passive funds by bringing to market 14 single-currency strategies that would mimic the results of holding a foreign currency in a bank account.

In paperwork it filed with U.S. regulators, iShares detailed plans for a group of funds that are designed to provide the daily return of the increase or decrease of a specific currency against the U.S. dollar, as well as the yield of that currency after fund fees and expenses.

To do so, the ETFs will own U.S. dollar-denominated short-term fixed-income securities and spot foreign exchange currency contracts in a mix that serves up exposure that’s equivalent to holding the actual foreign currency.

Currency ETFs are growing in number as fund providers try to tap into currencies’ noncorrelated returns as a way to help investors diversify cash allocations and hedge exposure to international markets.

“The dollar has largely sold off since the aftermath of the tech crash in early 2000s," IndexUniverse analyst Dennis Hudacheck said. "With more QE potentially coming, many investors are looking to diversify outside of the dollar to preserve their wealthin case the dollar falls further."

Until 2006, currency markets were the realm of banks and large international corporations, but the launch of Rydex’ CurrencyShares Euro Trust (NYSEArca: FXE) then opened the space to ETF investors. Since FXE came to market, a group of funds have followed, but they still represent only a small portion of the U.S. ETF market, with less than $3 billion in combined assets, according to data compiled by IndexUniverse.

The planned ETFs, for which no tickers or fees were disclosed, include:

  • iShares Australian Dollar Cash Rate Fund
  • iShares Singapore Dollar Cash Rate Fund
  • iShares Swedish Krona Cash Rate Fund
  • iShares Swiss Franc Cash Rate Fund
  • iShares Thai Offshore Baht Cash Rate Fund
  • iShares Turkish Lira Cash Rate Fund
  • iShares British Pound Cash Rate Fund
  • iShares Canadian Dollar Cash Rate Fund
  • iShares Chinese Offshore Renminbi Cash Rate Fund
  • iShares Euro Cash Rate Fund
  • iShares Japanese Yen Cash Rate Fund
  • iShares Mexican Peso Cash Rate Fund
  • iShares New Zealand Dollar Cash Rate Fund
  • iShares Norwegian Krone Cash Rate Fund

In the filing, iShares warned of the risks currency ETFs face when it comes to volatility due to the constantly changing economic environment in many economies, local policies and capital controls, as well as supply/demand balances.

The company also said that the ETFs are designed to “preserve liquidity, maintain stability of principal and preserve capital,” each measured in a fund’s respective currency.

The fixed-income portion of the portfolios will comprise high-quality debt from various issuers including U.S. government, corporate debt and bank notes, the company said. The fund’s weighted average maturity will be one to 30 days.

An interesting compeititve wrinkle is that iShares’ currency funds are "1940 Act" open-ended funds, meaning they will likely get a beneficial 15 percent long-term tax rate on capital gains, assuming tax rates don't change at the end of the year, if held longer than a year. That tax treatment is akin to WisdomTree’s forward-currency-contract-based currency ETFs, Hudacheck said.

By comparison, CurrencyShares ETFs such as FXE are grantor trusts that hold physical currency and get taxed as ordinary income regardless of the holding period.

"Of the 14 filings, the Norwegian krone fund has great potential since no such fund currently exists," Hudacheck added. "Norway is considered to have sound monetary policies and is not a member of the euro or the E.U., providing an alternative currency choice to the euro."

As a final clarification, the Chinese offshore renminbi used in the iShares’ China currency fund trades in Hong Kong and other markets outside mainland China, and is often referred to as “offshore yuan.”



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