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New Currency ETFs - Give Them Some Time

by: Roger Nusbaum May 14, 2008 | about stocks: BZF / CNY / CYB / EU / ICN / JYF    

Roger Nusbaum

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You may have seen that WisdomTree launched its first batch of currency ETFs today.

  • Chinese Yuan (CYB)
  • Indian Rupee (ICN)
  • Brazilian Real (BZF)
  • Euro (EU)
  • Japanese Yen (JYF)

The yen was included in the press release emailed to me but I think Bruce Lavine said on CNBC that it was not coming today, and the JYF ticker does not seem to work.

Personally I am excited about these, especially the yuan and the real, but as I usually say in my TSCM articles, give these time to show that they can do what they are supposed to.

The chart at right (click to enlarge) is of the Chinese yuan (charted backwards to make it apples to apples) against the Market Vectors Chinese Yuan ETN (CNY) since the ETN's inception. In that time the yuan is up a little over 1%, which is a decent move for two months for a currency, but the ETN is down 2%.

I might be missing something, but according to the Van Eck site CNY should track the S&P Chinese Renminbi Index less the fee. In the year ending March 31 this index was up 8.68%. The actual exchange rate in that time saw the yuan rise 10%, a 1.32% lag for the index. The market for yuan is complicated and that sort of variance is not shocking. But in just two months the variance between the fund and the actual exchange rate has been more than 3%, and to look at the chart, the correlation appears negative.

I don't know if this will fix itself or not, but it has given a bad first impression, so I say if you have any interest in the WisdomTree products -- and to be clear, I do -- I would say to give them a little time.

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This article has 4 comments:

  •  
    May 14 04:42 PM
    Its my impression that the currencies are held in NDF form (non-deliverable futures). i.e. you cant demand payment in the actual currency.

    While I dont know about the structure underlying the NDF (how are these issuers hedging? are they buying CNYs?) What this means is that during periods of high demand (rush into CNYs), they will likely incoporate some of the expected appreciation and trade at a premium fx rate. When everyone is selling, I expect a big discount.

    There are too many unanswered questions as to what one actually owns. What happens if convertibility is restrictred/suspended?
    Reply
  •  
    May 15 10:55 AM
    I would like some ETFs that short all these currencies, too. Being about to go long and short gives more flexibility.
    Reply
  •  
    May 16 03:33 AM
    I am watching intently. This is an exciting asset class for diversification. Like the author, I am watching the China and Brazil currency funds.
    Reply
  •  
    May 19 08:49 AM
    To Kurt Walter
    You can sell short these new currency ETF's....
    Reply
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