Much Ado About Nothing

February 20, 2007

Rydex rounds out its CurrencyShares with the launch of a Japanese Yen Trust. Will there be enough “interest”?

Rydex Investments finally rounded out the line-up of its CurrencyShares funds with the launch of the CurrencyShares Japanese Yen Trust (NYSE: FXY).  The new fund joins seven other CurrencyShares funds, as shown below.





Japanese Yen




Australian Dollar



$27.1 million

British Pound



$58.5 million

Canadian Dollar



$38.4 million

Euro Currency



$901.7 million

Mexican Peso



$9.1 million

Swedish Krona



$21.3 million

Swiss Franc



$43.9 million

The Euro Currency Trust (NYSE: FXE) was the first to launch, and by any measure, has been the most successful. After hitting the market in December 2005 (the six other funds came to market in June 2006), the euro has racked up nearly $1 billion in assets. The other funds have posted relatively anemic growth.

The euro's popularity, however, is no surprise: it is the second-most-traded currency in the world after the U.S. dollar, and - as anyone who's vacationed in Europe lately will tell you - it's been performing very, very well.

There's reason to hope the yen fund will catch on, though: it is the third most popular currency after the dollar and the euro, and many believe that the Japanese economy has turned the corner.

One quirk that may hold the fund down, however, is the lack of interest income. All CurrencyShares pay out local interest rates on deposits, minus a certain percentage. As the chart above shows, those rates range from a relatively anemic 1.5 percent for the Swiss franc to a surging 6+ percent for the Mexican peso.

Note the "0.00 percent" in the yen column - that's not a misprint. The fund is designed to pay interest equal to the Bank of Japan Overnight Call Rate minus 27 basis points. Right now, the BoJ is paying out 25 basis points, meaning that FXY earns zero income. (Rates don't go below zero.)

Like all CurrencyShares, the fund charges 40 basis point in expenses. For all the other funds, that 40 basis point expense ratio is paid for by interest income.  But with zero interest, FXY fund will actually have to sell off yen to pay the expense ratio. Each share currently represents 10,000 yen, but that number will decline over time. This could, of course, create a small amount of capital gains or capital losses - something we've seen with the gold bullion ETFs, which rely on a similar approach of selling off assets to pay the expenses.

Still, the fund is likely to do well, as it offers a unique window onto an important corner of the market. And the Bank of Japan is meeting next week to consider raising interest rates…

The prospectus is available here.

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