Russian Ruble ETF Debuts; New Carry Trade?

November 14, 2008

Investors finally have access to currency-based ETFs for all four of the BRIC nations (Brazil, Russia, India and China).


Investors finally have access to currency-based ETFs for all four of the BRIC nations (Brazil, Russia, India and China).

Rydex Investments has launched the CurrencyShares Russian Ruble Trust (NYSE Arca: XRU), the first Russian currency play in the exchange-traded format. WisdomTree offers the only Brazilian currency fund, while both WisdomTree and Van Eck offer plays on the Chinese and Indian currencies.

Rydex invented the currency category in ETFs, launching the CurrencyShares Euro Trust (NYSEArca: FXE) back in 2006. But XRU is the first true emerging market currency fund in Rydex's popular CurrencyShares family.

Rydex's first emerging market currency portfolio is more competitive on a fee basis than either Market Vectors' or WisdomTree's emerging currency investments. XRU has an expense ratio of 40 basis points, while the WisdomTree Dreyfus Brazilian Real Fund (NYSE Arca: BZF), the WisdomTree Dreyfus Chinese Yuan Fund (NYSE Arca: CYB) and the Wisdom Tree Dreyfus Indian Rupee Fund (NYSE Arca: ICN) all charge 45 basis points.

The Market Vectors Indian Rupee/USD ETN (NYSE Arca: INR) and Market Vectors Chinese Renminbi/USD ETN (NYSE Arca: CNY) have expense ratios of 55 basis points.

The timing of the launch is interesting. As part of the U.S. dollar surge against currencies worldwide, and oil's weakness, the ruble sank to a two-year low against the dollar in late October. The Russian stock markets have been in chaos recently, witnessing massive devaluations and frequent trading halts, and have dropped this year to levels reminiscent of the 1998 crash.

Yesterday, the major Russian exchanges, the MICEX Stock Exchange and the Russian Trading System Stock Exchange (RTS), had to be yet again closed due to sharp declines on Tuesday.

Russia Key Variable

Ed Lopez, director of ETF strategies at Rydex, said despite the short-term issues, Russia is still a critical economic story, and a major oil producer with the third-largest monetary reserves in the world, behind Japan and China.

He conceded that in the short term, asset-gathering could be slow going. The BRIC currencies were at their most popular earlier in the year as part of carry trades, and that trade has disappeared for the time being.

However, access to the ruble should spark immediate use from investors wanting to play the day-to-day volatility of the ruble, as well as investors who play one currency against another based on specific correlation stories.

For example, the ruble and the euro, Lopez explained, have a particularly high correlation, so investors can short the euro and its smaller yield (due to central banking policies in Europe) and go long the ruble, which has a central bank rate of 12%.

A similar play has been executed in the past by investors using the low-yielding CurrencyShares Japanese Yen Trust (NYSE Arca: FXY) and the high-yielding CurrencyShares Mexican Peso Trust (NYSE Arca: FXM).

Rydex's existing lineup of eight currency-based exchange-traded products—which use the grantor trust structure, in which currencies are directly held—track the euro, Australian dollar, British pound, Canadian dollar, Japanese yen, Mexican peso, Swedish krona and Swiss franc. In all, the CurrencyShares have $2.2 billion in assets, according to Citigroup Investment Research data.

WisdomTree, which uses an active approach to currency investing, and Barclays Global Investors and the Elements family, which use the exchange-traded note  format, also offer a wide range of currency funds.

The prospectus for XRU can be found here.



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