First currency ETF filed

First currency ETFRydex Investments has filed an application with the Securities and Exchange Commission for the first currency exchange-traded fund that would provide exposure to the euro.

Called the Euro Currency Trust, if approved the fund would trade on the New York Stock Exchange under the symbol “FXE,” according to a Tuesday filing.

The Bank of New York (BK: news, chart, profile) is the trustee for the ETF, and JPMorgan Chase Bank (JPM: news, chart, profile) is the depository, the filing said.

“The investment objective of the Trust is for the Shares to reflect the price of the euro,” the filing said.

Rockville, Md.-based Rydex manages about $13 billion through a family of leveraged and inverse index funds designed for short-term traders. The firm currently manages two ETFs.

Each ETF share will contain 40 euros held in an interest-bearing demand account at the London branch of JPMorgan Chase, with interest rates based on the Euro Over Night Index Average (EONIA) minus 0.2%.

The fund’s structure is similar to existing ETFs that invest in gold bullion, where bars of the precious metal are held in a vault, with each share representing a fraction of an ounce.

The euro fund will use the Federal Reserve Bank of New York Noon Buying Rate for the exchange rate, according to the filing. Therefore, based on the current rate of $1.2232 per euro on June 1, one ETF share would be priced at $48.93.

Fees for the ETF, which is structured as a trust, have not yet been determined, but it may sell off some of its euros to pay for expenses. These sales may trigger taxable events for shareholders, the filing said.

“It should be a relatively cheap way to get direct exposure to the [euro] currency and its interest-earning capabilities, and the ETF may also be used as a hedge,” said Jim Wiandt, industry observer and editor of the Journal of Indexes.

He called the fund a “very exciting new product that plunges ETFs into the largest and most liquid financial markets in the world — currency markets.”

However, Wiandt noted the ETF may not be the best vehicle for speculating on short-term currency rate movements. Investors won’t be able to get same leverage as traditional foreign-exchange accounts, which typically offer 100-to-1 leverage, he said.

With the ETF, most investors will be limited to traditional margin requirements, which at best offer a two-to-one ratio, Wiandt said.

Gary Gastineau, head of Summit, N.J. based ETF Consultants, said individual investors probably shouldn’t be speculating in the currency markets anyway.

“Currency speculation is probably a thing for the big guys rather than the little guy,” he said.

“That said, there’s nothing wrong with the product I can see from a regulatory standpoint,” Gastineau added, calling the ETF essentially a tradable “euro-denominated money-market fund.”

Last month Standard Asset Management filed an application with regulators for an ETF tied to crude-oil futures.

By John Spence

Source: MarketWatch

Photo via VisualHunt


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