Merk Hard Currency ETF Now In The Works

March 22, 2012

In a Pimco-esque twist, Axel Merk unveils plans to market his Hard Currency Fund in an ETF wrapper.


Axel Merk, the macro investor known for his expertise in currencies, is part of a plan to bring to market an ETF version of the dollar-bearish Merk Hard Currency Fund he manages—a move that’s reminiscent of how Pimco decided to market the flagship Total Return Fund run by Bill Gross in an ETF wrapper.

The Merk Hard Currency ETF will also be managed by Merk, a German-born investment manager who is president of Palo Alto, Calif.-based Merk Investment LLC. The Merk Hard Currency Fund, his firm’s biggest portfolio, is a nearly seven-year-old actively managed open-ended mutual fund with almost $600 million in assets.

The ETF will normally invest 80 percent of its net assets in hard-currency-denominated investments from countries that appear conducive to long-term price stability, according to regulatory paperwork filed with the Securities and Exchange Commission on March 21. Its investments will be composed of high-quality short-term debt instruments, including sovereign debt and gold.

The new ETF, which will trade on the New York Stock Exchange’s electronic trading platform Arca under the symbol “HRD,” is being shepherded through the regulatory process by Portland, Maine-based Forum Investment Advisors, which is in the process of obtaining “exemptive relief” to market active ETF strategies.

Forum filed for the permission from the SEC last summer, and it's unlikely it would put HRD into registration unless it was close to obtaining exemptive relief.

Forum itself is part of Atlantic Fund Services, which provides custodial and record-keeping services. The prospectus said Foreside Fund Services will be the ETF’s main underwriter and distributor. Forum and the other entities all have the same Portland, Maine address.

Apart from relying on a third party’s exemptive relief, Merk Investments LLC's plan looks like a repeat of Pimco’s move to create the Pimco Total Return ETF (NYSEArca: TRXT).

The ETF industry was abuzz as TRXT came to market March 1, which provided a clue as to how Pimco would preserve the cache of its $250 billion Total Return Fund, the world’s biggest mutual fund. While Merk’s currency fund is considerably smaller than the Total Return Fund, it’s move and Pimco’s are the clearest signal yet of how the numerous mutual fund companies that are seeking regulatory permission to market ETFs will approach the ETF market.

The moves suggest that established mutual fund companies are eager to jump onto the ETF bandwagon, but with products that already have clear reputations in the world of investing. By launching ETF versions of such marquee-name funds, Pimco and now Merk may be running the risk of cannibalizing assets from their respective mutual funds, but at least they’ve put in place a mechanism that keeps those assets in-house.

But, crucially, they seem to understand the growing importance of ETFs, which are extolled for their low costs and intraday tradability. The first ETF was launched 19 years ago, and U.S-listed ETF assets now total $1.209 trillion in more than 1,400 securities, according to data compiled by IndexUniverse.

The existing Merk Hard Currency Fund (MERKX) comes with a hefty 1.30 percent annual management fee, and the prospectus outlining the proposed ETF didn’t say how much HRD might cost. But if Pimco’s example is any guide, HRD will be a lot cheaper than the Hard Curreency mutual fund.

Pimco’s TRXT costs 0.55 percent, or 30 basis points cheaper than the “A” class mutual fund version that’s most appropriate for retail investors. Institutional investors to get that fee down to a no-load 46 basis points. The institutional version of the Hard Currency Fund (MHCIX) costs 1.05 percent, according to Merk Investments’ website.

Officials at Merk Investments declined to elaborate on the filing—a function of the so-called quiet period the SEC imposes when a fund is in the registration process.


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