United States Commodities Fund plans to enter realm of currency ETFs with a futures-baed offering.
United States Commodity Funds, the firm behind the $1.25 billion U.S. Oil Fund (NYSEArca: USO), filed paperwork with U.S. regulators to market its first currency fund, this one a futures-based currency ETF that would serve up exposure to a basket of five currencies at a time.
The U.S. Golden Currency Fund (NYSEArca: HARD) is a commodity pool comprised of futures contracts that represent equally weighted interest in five hard currencies that are widely used, easily exchangeable and issued by an economically strong country, the company said. The portfolio, which is rebalanced monthly, will have an estimated annual fee of 0.85 percent, including 0.60 percent in management fees.
The base currency for the strategy is the U.S. dollar, and therefore the dollar is not eligible to be one of the five currencies in the mix, the prospectus said.
Instead, the fund will select its exposure annually from the 25 most actively traded global currencies as measured every three years by the Bank of International Settlement currency trading report, the filing said. The latest BIS list, which was published in 2010, had the U.S. dollar, the euro, the Japanese yen, the British pound, the Australian dollar and the Swiss franc at the top.
HARD marks U.S. Commodity Funds’ entrance into the world of currency ETFs and, among other funds, will compete with the $25 million WisdomTree Dreyfus Commodity Currency Fund (NYSEArca: CCX), which has annual fees of 0.55 percent.
It will also compete with a group of bull-and-bear plays on global currencies by Invesco PowerShares. CurrencyShares is another fund sponsor in the space, although its lineup includes only single-currency portfolios.
In the filing, U.S. Commodity Funds warned of the potential risks to the portfolio’s performance in the face of contango or backwardation in any of the currency futures markets.
When a market is in contango, the front month in the futures curve is the cheapest one, meaning investors have to pay up to roll into another contract upon expiration, something that eats up returns overtime. Backwardation is the opposite, when the nearby contract is the most pricey and fund makes money on the “yield roll.”
Either way, these market conditions would prevent the fund’s net asset value from reflecting either the spot price of any of the given currencies, in dollar terms, or even reflect the percentage change of the basket for a period longer than a day, the company said in the filing.
Other selection criteria for HARD’s currency contracts include the currency’s issuing country’s credit ratings—it must be “AAA-“ or better—as well as a single currency’s previous three-year ranking relative to inflation. That inflation ranking is measured by looking at a currency’s change in price compared to one ounce of gold, the company said.
Currencies that are pegged to the U.S. dollar, and are not free floating, will also not be eligible for inclusion. That means China’s renminbi and the Hong Kong dollar are out of the mix.