I got to wondering whether the single currency ETFs could allow you to create your own DBV, or carry trade.Jyske Bank has a short PDF about the Swiss Franc as a funding currency in a similar manner as the yen.
This chart is the ratio of the peso ETF (FXM) compared to the Franc ETF (FXF). It shows that since inception the peso is up a lot vs. the swissi.
I picked the peso to look at simply because it is the highest yielding single currency ETF. According to Alligator Investor FXM yields 5.76% while FXF yields 0.61. The idea would be to short FXF, and pay the 0.61%, and go long FXM to take in the 5.76%. The net yield is 5.15%.
Since inception FXF is flat and FXM is up just under 7%. The idea would have worked if you had put the trade on earlier. You can study each currency and decide for yourself if it makes sense going forward. The point of this observation is to point out that there could be different ways to utilize these funds in the future, especially if more of them list.
There is no conclusion just possibilities for other applications of the product line.
6 comments:
Cool idea. Fundamental flaw:
Tried shorting the Rydex FX* ETFs? Certainly at dear old Fido, FXE - by far the biggest of the group - is only occasionally available to borrow. Of course, it would be simply fixed by - patriotic! - inverse issues but that's too simple...what we really need are equal-weighted S&P sector ETFs!!
I am so proud of you for using the term "carry trade"!
Forgive the snark, but man, two comments-heavy DVB posts without using the phrase really irked me. Thanks for getting to it.
Why are you wasting your time with ETFs? Open your clients commodities accounts and trade futures directly. No haggling over short rebates (they're baked into every trade), no worry about fees, nice low margin requirements.
Sure, you might still get screwed if your chosen carry ever unwinds (take Yen/$--Aug/Sep '88, for a black-monday downside). Even then, though, at least you get screwed by the market in a onetime blowup, not daily by your broker eating up interest or an ETF swallowing fees.
FD: still short carry by proxy with those Yen/$ calls. Finally in the money, but I honestly expect to eat my premium a few times.
At last I'm not paying anyone fees to do this.
Greg,
Great point I had not checked availability. I am surprised that even FXE is hard to borrow.
Many years ago when i entered the futures business as a broker my first customer shorted the peso. Nothing happened and he had to roll forward his contract for almost 2 years. The peso was roughly 12 to the dollar (a little over 8 cents ). Then one weekend it was devalued to 25 to the dollar. Later it went gradually to 2000 or more to the dollar. Then it was replaced by a new peso and a similar fate befell that version. In recent years the new new peso has done much better and I hope it continues to do ok. The citizens of Mexico have suffered enough from currency debasement. But my experience would still cause me to be very careful with long positions in pesos.
point noted on the peso, TY. Hopefuly it came across that the peso was just an example, I did say I picked it for the article because it was the highest yielder which is no analysis whatsoever, just an example.
HI Roger,
I am not sure how you typically diversify your portfolios, but was curious if you preferred to sue bond index funds or bond ETFs? I want to put a portion of my funds in an inflation protected bond fund, and am having a hard time deciding between VIPSX (Vanguard inflation protected securities) and TIPS (iShares Lehman TIPS Bond). Do you have any preferences one way or the other? Expenses for both are .2, and commissions would be the same since I add funds monthly. Curious what your thoughts are on this (being the ETF kinda guy you are).
Thanks for the killer site!
- Ryan
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