IT'S HARD TO
belive that the
Chicago Mercantile Exchange's
Similarly, the hugely popular ETF industry that's currently being embraced by many individuals and investment advisors also arrived just slightly ahead of its time. The first ETF the SPDR "Spider", debuted in 1993 but didn't really attract much attention for almost a decade. It's now one of the world's most vigorously traded instruments.
As longtime readers know, we're not hesitant to participate in investment ideas that haven't been given the Morningstar seal of approval. Whether its new markets like trading volatility, or new marketplaces like HedgeStreet or Prosper.com, I don't dither at becoming an early adopter if I see an opportunity not yet accepted by the slow-moving herd. Right now, I believe that adding foreign currency exposure offers another one of those unique opportunities.
From a portfolio perspective, one of the advantages is that currency markets are generally uncorrolated with most other asset classes. So if you own shares of Sirius Satellite Radio or Sun Microsystems, for example, a position in foreign currency is likely to move independently from those or other Nasdaq-listed issues. As we've pointed out many times over the years, diversification among non-correlated asset classes is an effective way to reduce portfolio volatility and risk.
For most of the 1990s, Americans could be blissfully oblivious to the notion of currency trading because the value of our own greenback turned out to be an exceptionally strong store of value. From 1995 through 2001, the U.S. Dollar Index rose by some 50%. In my opinion, recent price action suggests that long-entrenched trend has likely reversed.
The real story, however, is that now even Joe Six Pack can get into the currency game. In recent months, Rydex Investments has launched a slew of groundbreaking new ETFs that have opened up the asset class in fashion that was unimaginable even 10 years ago.
Just days after its launch last December, I crownedCurrencyShares' Euro Currency Trust as the "hottest trade of 2006." A quick refresher: FXE offers an effortless way to bet on (or against) the euro. Each share represents 100 euros plus accrued interest. If the euro strengthens relative to the U.S. dollar, then the price of FXE will rise. If the euro weakens, then FXE falls.
|FXE vs. S&P 500 YTD|
Thus far, the fund has performed strongly, rising over 8% amid a volatile and generally lackluster environment for equities. It's our conviction that price action the market itself is the best indicator of them all. So put aside all the economic prognostication, political debate and breaking news. The objective reality is that owning euros, and other major currencies besides the U.S. dollar, has generally been a profitable trade in recent months. The proof is in the performance.
Rydex's expansion of its currency offerings, therefore, comes at an opportune time to participate in an asset class that's showing promise with a brand-new product that's still far off most traders' radar screens.
On June 26, the firm expanded its lineup with a number of funds based on other currencies including CurrencyShares Australian Dollar Trust, CurrencyShares British Pound Sterling Trust, CurrencyShares Canadian Dollar Trust, CurrencyShares Mexican Peso Trust (, CurrencyShares Swedish Krona Trust and CurrencyShares Swiss Franc Trust. All can be traded through a standard brokerage account like General Electric, Cisco Systems or any other stock.
Shares of Euro Currency Trust, CurrencyShares British Pound Sterling Trust, CurrencyShares Swedish Krona Trust and CurrencyShares Swiss Franc Trust tend to move together as a euro block, while shares of CurrencyShares Canadian Dollar Trust and CurrencyShares Australian Dollar Trust both commodity currencies -- often track precious metals.
Shares of CurrencyShares Mexican Peso Trust, the only emerging market represented thus far, are correspondingly more volatile, and provide a clear example of how currencies are affected by a country's political climate. Once it became clear that business-friendly candidate Felipe Calder n was poised to win Mexico's recent Presidential election, shares of CurrencyShares Mexican Peso Trust jumped sharply higher.
As with Euro Currency Trust, a single share of each ETF represents 100 units of the base currency, with the funds holding the underlying currencies themselves. Unlike owning a foreign bond fund, the CurrencyShares ETFs don't expose you to interest-rate risk. Owning these products is akin to owning suitcases of the currency itself with dramatically better liquidity.
This is primarily what distinguishes these funds from prior currency securities. Previously, most speculative currency trading was done through futures contracts, highly leveraged bets that need to be constantly rolled as each contract expires. The CurrencyShares products track the "spot" price of each currency, don't need to be rolled and, best of all, pay modest dividends, as the fund's underlying currency holdings are held in interest-bearing accounts.
And while the investment has been profitable thus far, my prediction that the CurrencyShares Euro Fund would be trading a million shares a day has thus far been way too optimistic. Shares of CurrencyShares Euro Trust are averaging about 120,000 shares a day, which is downright minuscule, especially considering the Nasdaq-100 Trust trades more than 118 million in the same period. The newly launched funds are even more dormant. A recent morning saw shares of Currency Shares Mexican Peso trade 100 shares over a two-hour period. That's mighty quiet.
Still, even amid the sluggish volume, just as with Euro Trust, the spreads on all of these new products remain exceedingly tight, with thousands of contracts to trade within a generally firm spread averaging about 10 cents. The abundant liquidity and relatively modest vig make these funds attractive options for diversifying out of the U.S. dollar.
Moreover, the fact the funds still trade rather sluggish volumes is probably the best indicator that the herd has yet to even remotely embrace the trade. Fueled by the explosion in over-the-counter foreign exchange trading and a desire to seek out investments uncorrelated with equities, FX trading is just beginning to come into the 21st century. These new funds offer an exciting and unique opportunity for aggressive investors looking to up their game.
Jonathan Hoenig is managing member atCapitalistpig
Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.