New Currency ETNs Filed (With Interest Payments)

February 06, 2008

Barclays Capital has filed for three new currency-based exchange-traded notes (ETNs).

Barclays Capital has filed for three new currency-based exchange-traded notes (ETNs).

The move comes despite the negative tax ruling by the IRS on currency-based ETNs in December. The IRS said in that ruling that all single-currency instruments (including ETNs) should be taxed as debt, and that gains from both interest income and currency appreciation will be taxed at regular income rates (which range up to 35%). Prior to that, some believed that gains in currency ETNs could be taxed as capital gains, with rates topping out at 15%.

The new ruling actually put ETNs at a slight disadvantage to other currency-based products, such as currency-focused ETFs, because it said that taxes must be paid on interest income on an annual basis. That's a problem for ETNs because traditionally, interest income has not been paid out to noteholders; instead, it has simply been incorporated into the value of the note as "implied interest." With the new ruling, noteholders will be forced to pay taxes on implied interest each year, out of pocket, even though they will not realize the income until they sell the note.

Recognizing this disadvantage, two of the new ETN filings actually pay cash interest to noteholders on a quarterly basis. The notes will incorporate the implied interest over the course of the quarter and then go "ex-dividend" once the interest is paid.

Barclays does not appear to have amended the existing currency notes to adopt this new cash interest payment provision.

Asian And Gulf Revaluation ETN

The first ETN filing with this interest income payout is for the Barclays Asian and Gulf Currency Revaluation Notes, which are designed to provide exposure to five Middle Eastern and Asian market currencies that are officially tied to the value of the U.S. dollar. They are the Chinese yuan, Hong Kong dollar, Saudi Arabia riyal, Singapore dollar and United Arab Emirates dirham.

With the dollar under severe pressure, there are widespread expectations that these governments will revalue their currencies, or allow them to float further away from the dollar. If they do, this ETN should benefit. In the meantime, investors will be paid interest based on local interest rates. 

There is currently no way to easily access these currencies in an exchange-traded format, though WisdomTree has filed for a money market ETF tied to the Chinese yuan.

The ETN charges 0.89%. The pricing supplement is here.

Barclays GEMS Strategy

Barclays will also make interest payments on the new Barclays GEMS Strategy ETN, where GEMS stands for Global Emerging Markets Strategy. The ETN offers exposure to a 15-currency money market account, incorporating both local currency movements and local interest rates into the value of the note. The note covers a portfolio composed of five currencies from each of three geographic zones:

  • Eastern Europe, Middle East and Africa: Hungarian forint, Polish zloty, Russian ruble, South African rand, Turkish lira
  • Latin America: Argentine peso, Brazilian real, Chilean peso, Columbian peso and Mexican peso
  • Asia: Indian rupee, Indonesian rupiah, Philippine peso, South Korean won and Thai baht

The note charges 0.89% in annual expenses. The pricing supplement is available here.

The Carry Trade ETN

The final ETN—and one that Barclays will not make interest payments for—is the Barclays Intelligent Carry ETN, which intends to offer exposure to the carry trade. The carry trade is an institutional strategy that seeks to profit by borrowing money in low-yielding currencies and investing that money in high-yielding currencies. This index uses long and short forward positions in G10 currencies to execute the trade. The actual way the underlying index is calculated is complicated, relying on constrained mean variance optimization techniques to target a specific risk/reward trade-off. (You can read about it on page PS-14 and PS-15 of the pricing supplement.)

As of January 15, the index looked like this:









Swiss franc


Norwegian krone


Swedish krona


British pound


U.S. dollar


New Zealand dollar


Canadian dollar


Japanese yen


Australian dollar



Interestingly, the ETN charges investors for the bid/ask spread required to buy and sell the various currencies; it levies a fee of 0.007% for each index component.

The goal of the strategy is to deliver steady, market-neutral returns. According to Barclays, its annual returns since 2000 have ranged from 1% to 22%. The index has made a positive return each year.

This fund will compete head-to-head with the PowerShares DB G10 Currency Harvest Fund, which uses a similar (although simpler) strategy to execute the carry trade.

The note charges 0.65%. The pricing supplement is available here.

ETNs are debt instruments that trade like stocks or ETFs. The notes typically have little or no tracking error. However, as debt instruments, investors are exposed to the risk that the issuing bank (Barclays Capital) will go bankrupt. That seems unlikely, but of course, anything is possible.

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