Pounds, and Pesos, and Krona: Oh My!

June 25, 2006

According to the NYSE, Rydex will debut six new CurrencyShares ETFs on Monday, June 26.

Rydex Investments will launch six new CurrencyShares exchange-traded funds (ETFs) on Monday, June 26, as it expands on the remarkable success of its initial Euro Currency Trust (FXE). That fund, which provides investors with an easy and low-cost way to convert their dollars into euros (and earn interest on their deposits), has attracted more than $633 million in assets since launching in December of 2005.

The new ETFs will provide similar exposure to the following currencies:

CurrencyShares Australian Dollar Trust (ticker: FXA)
CurrencyShares British Pound Sterling Trust (ticker: FXB)
CurrencyShares Canadian Dollar Trust (ticker: FXC)
CurrencyShares Mexican Peso Trust (ticker: FXM)
CurrencyShares Swedish Krona Trust (ticker: FXS)
CurrencyShares Swiss Franc Trust (ticker: FXF)

The prospectuses are filed individually with the Securities and Exchange Commission, and are available through this link.  (Just click on the link for the appropriate fund, then click on the "HTML" link from Form S1 to see the relevant prospecuts.)

The funds have a beautiful simplicity: They hold the given foreign currency as their sole asset, with the requisite number of pounds (or pesos or krona) deposited at the London branch of J.P. Morgan.  The deposits earn interest income for the ETFs, with each fund earning a different level of interest depending on the home country funds rate of the particular currency.  Five of the funds earn the local LIBOR rate minus 40 basis points; the British Pound ETF earns the SONIA rate, which is the UK-equivalent of the Fed fund rate in the U.S.

The current interest rates (as of June 14) for the ETFs are:

Australian dollar: 5.28%
British Pound: 4.55%
Canadian Dollar: 3.71%
Mexican Peso: 6.43%
Swedish Krona: 1.58%
Swiss Franc: 0.78%

By comparison, the Euro Currency Trust (FXE) currently pays interest of 2.58 percent per year.

All of the ETFs charge 40 basis points in annual expenses, to be paid out of the interest income.

It will be interesting to see if these funds attract the level of interest of the Euro fund.  Many investors use FXE as a way to hedge their exposure to the dollar. These funds won't attract that core attention, as the Euro is the most obvious counterpart to dollar exposure. But the funds could be useful for investors looking for fundamental exposure to natural-resource-driven economies such as Canada and Australia. 

Another application of these funds would be to provide investors with an easy way to pair currency trades. Currency traders often take opposing positions in major currencies, often pairing long exposure to a currency that pyas a high interest rate with short exposure to another currency with a lower interest rate; historically, that approach has produced some very nifty long-term returns.  In fact, the innovative folks at Deutsche Bank are using just that approach to create their own hedge-fund-like currency ETF.  For investors who can't wait for the Deutsche Bank product, or who want more targeted exposure, the new Rydex ETFs could make for great tools.

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