With currency volatility on the rise, there’s a handy new tool to manage foreign-exchange (FX) exposure – exchange-traded currencies (ETCs). These trackers are designed to appeal to high-net-worth individuals who want an easy way to deal in a range of global currencies, but who don’t have the scale to set up several accounts or to deal in the wholesale market. If you’d like to park your money in yen for a while, for example, and want an alternative to suffering the rip-off currency and interest rates offered by your bank, ETCs may be for you. But if you see yourself as the next George Soros and want to trade foreign exchange short-term and with high leverage, they’re not.
Currently, ETF Securities’ London-listed ETCs offer long or short exposure to nine FX ‘majors’ against the US dollar: Australian, Canadian and New Zealand dollars; sterling; euros; Swiss francs; yen; and Norwegian and Swedish kroner.
The basic mechanics of ETCs mean that over your holding period you earn the move in the ‘spot’ FX rate, plus the return on one-month US Treasury bills, plus or minus an interest-rate differential to reflect any difference in money market interest rates between the currency concerned and the US dollar. The long Australian dollar ETC, for example, earns you around 4% a year in interest at current rates. To short the AUD, you’d pay the same amount. Since the ETCs were launched late last year, most cash has headed for those offering short exposure to perceived problem currencies. The short euro long US dollar (LSE: SEUR) and short Australian, long US dollar (LSE: SAUD) ETCs have benefited most.
There’s a 0.39% annual management fee, plus a 0.6% spread to reflect the cost of rolling the underlying FX position forward daily. You’ll also need to take into account bid-offer spreads (around 0.2% on the more liquid ETCs) and any broker charges. But given the likely cost of asking your high-street bank to set up an account to hold Norwegian kroner for you, ETCs will probably compare well.
But there’s a very important point for sterling investors to understand. The base currency for the ETCs is US dollars, although they can be traded in sterling. But if you buy the sterling version note that any rise or fall in the sterling/dollar exchange rate affects your return over and above what happens to the currency pair.
• Paul Amery edits
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