WITH more than $3 trillion traded in the volatile foreign exchange markets every day, private investors have increasingly been angling for a slice of the action. And last week, exchange-traded funds (ETFs) provider ETF Securities launched a new way for individuals to gain exposure to the world’s most liquid market.<br /><br />The ETF-provider has launched Europe’s first – and the world’s largest – exchange-traded currency platform. Listed on the London Stock Exchange (LSE), the platform gives investors exposure to 18 currency ETFs, which provide long or short exposure to the G10 currencies against the US dollar.<br /><br />Exchange-traded currencies are nothing new in the United States, which has a much more mature ETF market than the UK. But even the largest American exchange traded currency platform only has nine products on it. While there are already some ETFs that give investors currency exposure such as db x-trackers’ sterling money market ETF, these new products from ETF Securities are the first to give Europeans exposure to specific currency pairs through the structure of an exchange-traded product. <br /><br />At the moment, these products are both dollar and sterling-denominated, but Bienkowski says that euro-denominated ETCs are coming soon in order to cater for the provider’s Eurozone-based clients.<br /><br />These funds track Morgan Stanley’s recently-launched total return currency indices, which are designed to be a tradable benchmark for foreign exchange rate performance of the related currency pairs. <br /><br />These indices accrue interest daily at the one-month Treasury Bill rate, which means that the daily return on the related index will be calculated as the sum of the MSFX currency return and the one-month T-Bill return.<br /><br /><strong>FORWARD MARKET</strong><br />Like other exchange-traded products, these currency ETCs can be can be created and redeemed continuously by market makers and they can be traded by investors on the exchange.<br /><br />The funds’ market makers enter the forward market and buy currency forwards that would expire the next day, and then roll over their position into a new short-dated forward. These are very liquid markets and, as market commentator Felix Salmon writes, the “constant rolling one-day exposure in the forwards market does an excellent job of reflecting the differences in local interest rates”.<br /><br />These forward markets have tight spreads that are normally only available to institutional players but through these currency ETCs, the private individual can also benefit from the better terms at low management fees (39 basis points management charge per year, and which is accrued daily).<br /><br /><strong>FULLY COLLATERALISED</strong><br />And while some ETF investors might be worried about how safe these products are, ETF Securities’ chief operating officer Nic Bienkowski assures clients that the products are fully collateralised and sometimes even over-collateralised to as much as 110 per cent. However, with your counterpart being Morgan Stanley, that does expose you to the bank’s credit risk on a synthetic product (its currency indices have been artificially created by the firm). <br /><br />So what advantages do these currency ETCs have over other methods already on offer to the private investor? Their biggest advantage – and perhaps also their biggest disadvantage, depending on your view – is that they are not leveraged. You can also trade just one ETC if you so choose. Investors are therefore less predisposed to overexpose themselves to the currency market and can tailor the size of their position. <br /><br />And of course those tighter spreads make them potentially much more profitable than spread betting on currencies or using contracts for difference.<br /><br />But how easy is it for investors to realise their trading views using these products? In theory it should be just as easy to implement forex strategies using these products as any other. <br /><br />Bienkowski says that retail investors should be able to use a carry trade strategy thanks to the underlying currency index rebalancing every night and the local overnight interest rates being incorporated into the index’s value. So if you want to implement a carry trade strategy you would look to buy the short dollar, long yen exchange-traded currency.<br /><br />These products are also intended for investors wishing to diversify their portfolios through the addition of a new asset class which has a low correlation with equities and bonds, or for those investors wanting to take advantage of tactical or strategic macro opportunities using the foreign exchange market, according to ETF Securities. <br /><br />These new and exciting products have only just been launched, but if the US is any guide, more will follow.<br /><br /><strong>CURRENCY ETCS </strong> WHAT’S ON OFFER<br />• Long Aussie dollar, short US dollar<br />• Long sterling, short US dollar<br />• Long Canadian dollar, short US dollar<br />• Long euro, short US dollar<br />• Long Japanese yen, short US dollar<br />• Long New Zealand dollar, short US dollar<br />• Long Norwegian krone, short US dollar<br />• Long Swedish krona, short US dollar<br />• Long Swiss franc, short US dollar<br /><br />• Short Aussie dollar, long US dollar<br />• Short sterling, long US dollar<br />• Short Canadian dollar, long US dollar<br />• Short euro, long US dollar<br />• Short Japanese yen, long US dollar<br />• Short New Zealand dollar, long US dollar<br />• Short Norwegian krone, long US dollar<br />• Short Swedish krona, long US dollar<br />• Short Swiss franc, long US dollar<br /><br /><strong>ETFS </strong>OTHER NEW PRODUCTS<br />• <strong>Short ETFs</strong> – these are designed to track the performance of the index and allow investors to profit from a falling market without actually needing to go short. Investors using these should be aware of the effect of compounding, which causes the ETF’s performance to diverge from that of the asset.<br /><br />• <strong>Leveraged ETFs </strong>– standard ETFs are not leveraged, but in response to clients’ demand for geared exposure, providers have started offering super or ultra ETFs, which multiply up (or down) an investor’s gains (or losses).