First Emerging Asian Currency ETN Launches

September 04, 2008

Third currency exchange-traded product comes out offering interest payments for income-minded investors.

The first means for individual investors toeasily gain access to emerging Asian currencies debuted on Thursday.

But in this time of amore relaxed pace to global economic growth, another wrinkle could be of just as much interest. That's the fact that investors in the newETN will receive monthly interest payments in addition to its underlying index's rate of return.

The Barclays GEMS Asia 8 ETN(NYSEArca: AYT) is actually the third such dividend-paying currency exchange-tradedproduct on the market. It launches after Barclays Capital came out with itsGEMS Index ETN (NYSEArca: JEM) and the Asian and Gulf Currency Revaluation ETN(NYSEArca: PGD).

"This is a brand new concept tooffer currency exchange-traded products that also pay income," said ChanceCarson, a Colorado Springs, Colo.-based advisor and editor of

Normally, currency ETNs willcombine the price and interest earnings into calculating the underlyingbenchmark's value. "Currency ETNs allow investors for the first time to get interestpayments passed through to them as well as participating in a particularcurrency's price appreciation," Carson said.

Interest payments for AYT will betreated as ordinary income, meaning investors won't get any tax breaks if heldoutside of tax-deferred accounts.

"The only way you could do somethinglike this in the past is through making direct deposits in overseas banks,"Carson added. "These three new ETNs represent the beginning of a trend that'slikely to increase as more retired investors reach out to find different waysto gain more income across the world."

The idea for AYT came frominstitutional clients, says PhilippeEl-Asmar, a Barclays Capital marketing director. "This is a note we issuedsome time ago in response to client demand. Now, we're making it available tomore clients by listing it through an exchange," he said.

Currently, of the 34 other ETNs orexchange-traded funds on the market providing access to currencies, the closestto AYT is JEM. Like AYT, it holds a basket of currencies through exposure toshort-term notes and securities in local markets. But while the newest memberof the group represents eight emerging Asian markets, JEM holds 15 different currencies.

The more diversified JEM has fiveeach from South America, Asia and the Middle East. AYT provides exposure to: the Indonesian rupiah, the Indianrupee, the Philippine Peso, the South Korean Won, the Thai baht, the Malaysianringgit, the Taiwanese dollar and the Chinese yuan. Like Barclays' JEMand PGD, the new ETN's index is equal-weighted.

"In a low-yield environment as wehave now in the U.S., this approach to payout monthly coupons might prove to beattractive to income-minded investors," said Greg King, head of Barclays' advisorsolutions group.  

Every month, the income paymentswill come in the form of coupon yields since they're based on notes. Those yieldswill float since they're calculated using weighted averages based on one-month impliedyields. For example, AYT's underlying index as of Aug. 20 had a current annualizedyield of 4.56%.

"In general, yields in emergingmarkets currencies have been higher than in developed markets," said King.

By contrast, JEM has been yieldingin the neighborhood of 7% over recent months. But that has swung as high as 9%as currency markets have been more volatile than normal of late. The spreadsbetween high- and low- yielding currencies across emerging markets is alsostarting to show wider gaps. For example, the Turkish lira has been yielding asmuch as 16% in recent months.

In the last month, currency rateson seven of AYT's currencies have been falling, led by the South Korean won's7% drop and the Indonesian rupiah's 6% slide. The exception has been theChinese yuan, which has produced modest gains.

‘It appears that interest ratesare going to keep falling in Asia, with the exception of the yuan, as globaleconomic conditions continue to slow," Carson said.

In emerging markets, he preferscurrency plays in Mexico where yields are averaging around 8.25% and Brazil,where rates are even higher.

As a result, Carson believes thatwhile it's a well-constructed ETN, AYT might be coming to market at the wrongtime for investors to jump aboard right now.

"This currency is just tooconcentrated. With the exception of China and India, these other countries areall pretty dependent on exporting business," he said. "The potential decline incurrencies from this region and the relatively low yields this ETN is payingright now makes this a rather risky play. There's just not enough incomeprotection at this point."

Carson prefers Mexico, whereyields are around 8.25%. And Brazil has even higher yields right now, he notes.

"If I was going for yield, I'dlike greater diversity than just focusing on Asia with something like JEM,"Carson added. "Maybe six- to 12-months from now AYT would be a good play. But I'dwait on this one or wade into it very cautiously."

AYT's yearly fees are expected to wind up around 0.89% as a percentage of assets. 

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