Choosing the right ETF as euro keeps sliding.
The euro’s 6.8 percent slide since concern over Greece’s solvency grew to a fevered pitch in mid-January has put sharper focus on exchange-traded products, especially the CurrencyShares Euro Trust (NYSEArca: FXE), as investors look for ways to profit from problems with the euro without trading directly in currency markets.
The euro’s fall, now totaling 10.4 percent since it peaked against the dollar on Dec. 1 of last year, is far from over, according to some analysts. Buying and selling actual euros and other currencies to set up multiple cross-trades can be painstaking and complex, making owning any one of the seven currently offered ETFs and ETNs more simple, less time-consuming and potentially more profitable.
That’s particularly true of FXE, whose tax drawbacks are mitigated by the fact it’s the biggest and perhaps most easily tradable of the ETPs. Also, one of the four “geared” products offered that multiply returns or losses by two could work for investors looking to make bigger bets for less money, and those wagering on euro declines have had more success attracting money than their bullish counterparts.
“They're pretty efficient vehicles for trading currencies from the perspective of the individual investor who doesn't want to get involved in either futures or leveraged foreign exchange," said Andrew Wilkinson, senior market analyst at Greenwich, Conn.-based Interactive Brokers Group.
Tax Issues, Tax Solutions
FXE is the oldest of the products, with the $677 million in assets gathered since it launched in December 2005, dwarfing any of its competitors. That makes it more tradable than most of its smaller competitors, boasting a relatively tight bid/ask spread of 0.10 percent, according to Morningstar. Its annual cost is 0.40 percentage points, or 40 basis points. (One-hundred basis points equal 1 percentage point.)
Still, because it owns actual euros, it’s taxed as a currency investment: All gains are considered ordinary income, even if the holding period is more than a year.
The WisdomTree Dreyfus Euro Fund (NYSEArca: EU) is a viable alternative that avoids FXE’s tax issues because, despite the name, it doesn’t actually hold currency. It holds short-term, fixed-income securities, and uses those to achieve returns that reflect euro money market rates. As a bond fund, its gains can be classified as long term if the holding period exceeds a year. EU isn’t a money market fund and is not bound by the regulations associated with such products. It’s an actively managed ETF with 11 holdings and is also the cheapest of the euro ETPs, with an expense ratio of 35 basis points. It launched in May 2008, and has $18.1 million in assets.
A third ETP offering one-to-one euro exposure is the iPath EUR/USD Exchange Rate ETN (NYSE Arca: ERO). ETNs are debt issues—this one backed by the good faith and credit of Barclays. The bank guarantees that ERO’s returns will match the euro’s performance in currency markets, before expenses. The ETN began trading in May 2007 and now has $7.8 million in assets. It charges an annual fee of 40 basis points, the same as FXE. As with any single-currency ETNs, profits are taxed as ordinary income rather than long-term capital gains, making its taxation status about the same as FXE.