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 above 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 looks like it is 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.
6 comments:
Roger, your article mistates the Market Vectors Renmimbi ticker as CYN when actually it is CNY (it is correct in your chart). Why do you think that CNY is tracking so poorly, and if it is, don't you think it is due for a snap back at some point? Also, can you explain the differences in methodology between CNY and the new CYB?
i think i fixed the typo, thank you.
I am not sure why it is tracking poorly but as far as snapping back, the goal is tracking the yuan as stated in the body of the post. if it somehow caught up that would not instill confidence that it can properly track. it is supposed to track a currency. It might start doing that from here I don;t know.
CYB will be an ETF that owns something as opposed to CNY which is an ETN which owns nothing and is merely a promise to track what it is supposed to track (promise is not the best word but is good for word economy).
These will be interesting to watch. I want to put a currency component into my strategy 3 but haven't figured out how to do it yet.
Btw, I placing a bet against the market today (UCPIX). Too many stars are aligning in favor of a sell off sometime during the next few weeks. I might be jumping the gun put my exit plan is hair trigger.
I think the ETN may have a huge tracking error because they use forward contracts. The Renminbi was already pricing in huge appreciation.
I'm wary of the ETNs myself. Everbank offers a Renminbi deposit account (I think it's FDIC insured too), but it does not pay interest.
They do not offer it in a CD, unfortunately.
To buy ETNs for foreign currency like the Yen or Euro makes little sense to me. I have an F/X account at Oanda and one can easily control the position size. It costs only a tiny spread to take the position. And, for something like the Renminbi, I'd rather own the currency though something like Everbank.
The ETNs make no sense. It's a "me too" product. There are much better ways to own foreign currency.
Roger,
What happened to the currency fund from Pimco that El Arian the VP from Harvard is to run? When is it supposed to be released.
Thanks,
BWJR
The total return to an investor from holding CNY derives from an S&P Index which uses 3 m non-deliverable forwards, rolled 4 times a year. The problem is that these forwards are not deliverable, because China does not have a convertible capital account. A normal currency forward's (like JPY) return would be equal to the change in spot CNY/USD Currency + the interest rate differential between the US and China. In this case, an investor would have "positive carry" by holding Chinese Yuan, since Chinese deposit rates are higher than those in the US. The caveat, and its a big caveat, is that non deliverable forwards do not deliver the interest rate difference to an investor or the change in spot rate, they are purely a function of supply and demand in the OTC market, so if everyone has piled into and is long the non deliverable forwards, you can actually lose money as the forwards converge towards spot. In other words, if the 3 m forward is discounting a 6% appreciation of the CNY, but CNY spot only goes up 2%, you will actually lose -4% by holding the CNY etn. In other words, you only make money holding CNY if spot currency rate moves more than what has been discounted by the forwards. Its not clear to me if CYB has the same problem or not, but owning CNY is NOT the same as holding the Chinese Yuan. This is the huge danger of NDFs for an investor.
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