Ludwig: One of the things that caught our attention in the prospectus is that you stipulated usage of a replication strategy, but left open the possibility you could use sampling where replication wasn’t possible. Why was that included in the prospectus?
McCabe: The difference is their market structure is somewhat different than ours. These companies trade in round lots. So in order to fully replicate, you would need a complete perfect odd-lot portfolio, which, although it is available, it’s very difficult for certain market participants to be able to trade in that manner. So the optimization comes from the fact that you’re using a round-lot portfolio for creation and redemption.
Ludwig: So it’s not exactly like sampling that you might see in a large bond fund, for example?
McCabe: No, it’s not sampling like with an MSCI index. We’re going to be holding all 225 names, and our tracking should hopefully be very precise.
Ludwig: One of the things that might be alluring when you look at that WisdomTree Japan ETF, DXJ, is the currency hedging. Your ETF NKY will not be currency hedged. Why did you go about it this way? The yen is kind of an odd beast in the world currency markets. And if it appreciates, that’s good for a holder of NKY based in the United States, but it’s no guarantee that that will remain the case. In fact, the strong yen is probably bad for the Japanese economy, longer term.
McCabe: Actually no, because what happens if the yen strengthens is that they end up being able to purchase more commodities with fewer yen. So as they’re building and rebuilding from the calamity, the strong yen is really benefiting Japan.
Ludwig: Fair enough. And, a holder of NKY who watches the yen appreciate will watch their NKY returns higher as well?
Ludwig: Any plans to do a currency-hedged version of NKY down the road?
McCabe: Not necessarily out of the gate. Initially we think that this is the right product. It is a U.S. product. It will be traded in dollars and priced in dollars. There are Nikkei 225 products, like I said, that trade in other currencies. The majority of professionals are going to have the ability to hedge that currency exposure for themselves, if they wish.
Ludwig: What does the future hold for your firm, Precidian, now that NKY is live? You and I have talked at length about active ETFs, for example. I presume that would probably be part of the mix at some point, right?
McCabe: Yes, we’ve obviously worked on that for a very long period of time. And we’re hopeful that something will come to fruition there in the near term.
But we’re also looking at new structures that don’t exist in today’s market that would really be customer friendly.
Ludwig: Index-based strategies?
McCabe: They will be index-based strategies with different distribution models than exist today. And, not distribution channels—the actual distributions off of the ETF itself. So one of the things that we would like to work on is what we would call a managed distribution exchange-rate fund platform. The distribution product that we envision would be a wrapper that can be placed around today’s ETFs or indexes that will offer greater flexibility. We intend to manage the funds to create predefined distributions that will be tax efficient through a patented fund-management process. This will help to create new types of “yielding” vehicles. We want to do things other people can’t do in today’s world.
Ludwig: I won’t take up any more of your time, but I have to say, again, regarding the Nikkei 225 ETF, I’m still amazed that Europeans or Asians pulled this off first. America always extols itself as the great entrepreneurial culture. And here the U.S. is: The caboose on this, with your NKY.
McCabe: Hopefully we can bring it up from behind.