Merk’s Hard Currency ETF

April 04, 2012

Axel Merk has upped the ante with plans to bring his flagship Hard Currency mutual fund to market in an ETF wrapper.

According to the filing, the ETF version of the Merk Hard Currency Fund (MERKX) will trade on Arca, the New York Stock Exchange’s electronic trading platform, with the ticker, “HRD.” Like the mutual fund, the new ETF will be actively managed by Merk himself.

While fund fee details are still undisclosed, it’s widely expected that HRD will cost less than MERKX’s annual cost of 1.30 percent.

Launched in May 2005, MERKX aims to profit from the falling U.S. dollar relative to a basket of currencies from countries that the manager believes to have sound monetary policies. Also included in the portfolio is gold, which Merk considers to be the only true currency with intrinsic value.

As much as I’ve been a fan of MERKX for years, I’ve always felt that paying 1.30 percent for a currency fund was a bit steep, even though it’s a “no-load” fund. So naturally, this ETF filing was exciting news to me.

Currency Exposure Strategy

When considering currency ETPs, it’s essential to know its investment strategy. Knowing how the fund is structured can also lead to significantly different tax implications.

Certain funds, like WisdomTree’s currency funds, hold locally denominated money market instruments and/or use forward currency contracts. However, using forward contracts can at times produce diverging returns from the underlying currency, for better or worse.

Others, like Guggenheim’s CurrencyShares, hold the underlying currency notes in deposit accounts. Shares are backed by the actual currency in question, so they provide direct exposure to the currency relative to the dollar.

HRD will be structured much like the WisdomTree funds. According to its filing, HRD will hold local money market and short-term debt instruments, including sovereigns, as well as forward currency contracts. Its gold exposure will be through exchange-traded gold products.

If fact, one can even make the argument that HRD will be more of a hybrid of currency and fixed-income fund. Add gold to the mix, and HRD can even pass as an asset allocation fund of sorts.

Since HRD will be structured as an open-end fund, it has some tax benefits—gains should qualify for the 15 percent long-term rate if shares are held more than a year. In comparison, all gains in CurrencyShares ETFs are taxed as ordinary income.

An important side note to consider is that the current tax code is set to expire at the end of 2012, unless extended. So investors should keep an eye out for developments on this front in the coming year.

Currency Composition

MERKX doesn’t specifically limit itself to developed-market currencies, but based on its holdings, it’s pretty clear that Merk is banking heavily on the currencies of commodity-producing developed nations.

As of Feb. 29 of this year, MERKX was heavily weighted—roughly 60 percent—in the Australian dollar, Canadian dollar, Norwegian krone and New Zealand dollar.

Interestingly, the WisdomTree Dreyfus Commodity Currency Fund (NYSEArca: CCX) equal-weights these same four developed-market currencies, along with four other emerging market commodity currencies—the Brazilian real, the Russian ruble, the Chilean peso and the South African rand.

 

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