iShares, the largest ETF provider in the world, is looking to
add actively managed currency ETFs to its vast roster of passive
funds by bringing to market 14 single-currency strategies that
would mimic the results of holding a foreign currency in a bank
account.
In paperwork it filed with U.S. regulators, iShares detailed
plans for a group of funds that are designed to provide the daily
return of the increase or decrease of a specific currency against
the U.S. dollar, as well as the yield of that currency after fund
fees and expenses.
To do so, the ETFs will own U.S. dollar-denominated short-term
fixed-income securities and spot foreign exchange currency
contracts in a mix that serves up exposure that's equivalent to
holding the actual foreign currency.
Currency ETFs are growing in number as fund providers try to tap
into currencies' noncorrelated returns as a way to help investors
diversify cash allocations and hedge exposure to international
markets.
"The dollar has largely sold off since the aftermath of the tech
crash in early 2000s,' IndexUniverse analyst Dennis Hudacheck said.
'With more QE potentially coming, many investors are looking to
diversify outside of the dollar to preserve their wealthin case the
dollar falls further.'
Until 2006, currency markets were the realm of banks and large
international corporations, but the launch of Rydex' CurrencyShares
Euro Trust (NYSEArca:FXE) then opened the space to ETF investors.
Since FXE came to market, a group of funds have followed, but they
still represent only a small portion of the U.S. ETF market, with
less than $3 billion in combined assets, according to data compiled
by IndexUniverse.
The planned ETFs, for which no tickers or fees were disclosed,
include:
- iShares Australian Dollar Cash Rate Fund
- iShares Singapore Dollar Cash Rate Fund
- iShares Swedish Krona Cash Rate Fund
- iShares Swiss Franc Cash Rate Fund
- iShares Thai Offshore Baht Cash Rate Fund
- iShares Turkish Lira Cash Rate Fund
- iShares British Pound Cash Rate Fund
- iShares Canadian Dollar Cash Rate Fund
- iShares Chinese Offshore Renminbi Cash Rate Fund
- iShares Euro Cash Rate Fund
- iShares Japanese Yen Cash Rate Fund
- iShares Mexican Peso Cash Rate Fund
- iShares New Zealand Dollar Cash Rate Fund
- iShares Norwegian Krone Cash Rate Fund
In the filing, iShares warned of the risks currency ETFs face
when it comes to volatility due to the constantly changing economic
environment in many economies, local policies and capital controls,
as well as supply/demand balances.
The company also said that the ETFs are designed to "preserve
liquidity, maintain stability of principal and preserve capital,"
each measured in a fund's respective currency.
The fixed-income portion of the portfolios will comprise
high-quality debt from various issuers including U.S. government,
corporate debt and bank notes, the company said. The fund's
weighted average maturity will be one to 30 days.
An interesting compeititve wrinkle is that iShares' currency
funds are '1940 Act' open-ended funds, meaning they will likely get
a beneficial 15 percent long-term tax rate on capital gains,
assuming tax rates don't change at the end of the year, if held
longer than a year. That tax treatment is akin to WisdomTree's
forward-currency-contract-based currency ETFs, Hudacheck said.
By comparison, CurrencyShares ETFs such as FXE are grantor
trusts that hold physical currency and get taxed as ordinary income
regardless of the holding period.
'Of the 14 filings, the Norwegian krone fund has great potential
since no such fund currently exists,' Hudacheck added. 'Norway is
considered to have sound monetary policies and is not a member of
the euro or the E.U., providing an alternative currency choice to
the euro.'
As a final clarification, the Chinese offshore renminbi used in
the iShares' China currency fund trades in Hong Kong and other
markets outside mainland China, and is often referred to as
"offshore yuan."
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