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Foreign currency trading is not just for gamblers or hungover commodity traders. It really has become a respected asset classification and is ex tremely popular with professionally managed trading entities and hedge funds. Foreign currency is so hot that major players are taking it to the ex treme. How so? Well, there is now what is called exchange traded funds (ETFs) on foreign currencies. The first to be introduced was the Euro Cur rency Trust (FXE). On the first day of trading, the Euro Currency Trust had over 600,000 shares trading hands.

Advantages and Disadvantages

As with any product, there are advantages and disadvantages to ETFs. One is that this vehicle has an annual expense of 0.4 percent of assets. If that amount is not enough (the interest rate is below the 0.4 percent expense ratio), then the sponsor can withdraw deposited euros as needed, which could diminish the amount of euros each ETF share represents. The cur rency ETFs are linked to the spot price versus the U.S. dollar. The obvious strategy to make money in these vehicles is to see the value move in the de sired trade direction (you can buy and sell short) and to cover the interest charge less the trust expenses.

The benefactor or the depository for the ETF is JP Morgan Chase Bank. This product is structured as a grantor trust, and Bank of New York is the trustee. Here is how JP Morgan will make money: It will maintain two euro denominated accounts in London , a primary account that will earn interest and a secondary account that will not earn interest. JP Morgan will not be paid a fee for its services to the ETF. It will instead generate an income or accept the risk of loss based on its ability to earn a spread on the interest it pays to the trust by using the trust's euro position to make loans in other banking situations. To be sure, JP Morgan has an advantage of floating money, so I would not worry that it will put itself in a position of extreme risk. As it has control over granting lending rates, I do not think that anyone will expect that the trust will pay the best available interest rate back to the

ETF so it will lock in a profit. The bank is in the business of making money. The best feature for individual investors for using an ETF is that it allows one to accumulate exposure without excessive leverage in the euro cur rency for a long-term position play. It can also be used as another means to hedge forex transactions. Each share of the ETF will represent 100 euros plus accrued interest. Under the guidelines of an ETF, it is acceptable to trade the short side without the uptick rule. Also, ETFs are listed on ex changes and trade throughout the day like individual securities. Since it is a tradable vehicle, unlike the forex market, it does charge a commission, which needs to be paid to a brokerage firm, to buy or to sell ETF shares.

Downside Risk

One of the downside risks to U.S. shareholders is that these ETFs are not insured by the Federal Deposit Insurance Corporation (FDIC), according to documents filed with the Securities and Exchange Commission (SEC). Also, interest on the primary account accrues daily, with rates based on the most recent Euro Overnight Index Average (EONIA), minus 0.27 percent that is paid monthly. The rate can change over time, according to the prospectus from Rydex; so there is no fixed rate or cost. This is a minor consideration; but for a large hedge fund, this could make a difference to an individual investor looking to take advantage of a long-term investment play. I hardly think this will cause a major change in the value of the in vestment.

For the record, the ETF's net asset value (NAV) is based on the Federal Reserve Bank of New York noon buying rate and expressed in U.S. dollars. And as you can imagine, the true influence on the value of this product is the same group of variables that affect the spot currency markets. There fore, I believe that combining traditional technical analysis with the futures data, such as the Commitments of Traders Report, Volume and Open In terest studies, can greatly enhance the performance of longer-term in vestors over time. In June 2006, Rydex released six additional curency ETFs. So if you want to hedge or speculate that the U.S. dollar is strength ening or weakening against major foreign currencies and like the idea and concept of ETFs, now there is a pretty good inventory of product to choose from. The new currency ETFs trade on the New York Stock Exchange (NYSE) uner the symbols shown in Table 1.4.

To summarize, each unit represents 100 shares. You can sell short with out the uptick rule that exists in stocks. ETFs allow a longer-term trader with limited risk capital to participate in an opportunity against the U.S. dollar versus major currency markets. Trading hours are during the U.S. equity markets' session— 9:30 A . M . (EST) until 4:00 P . M . (EST).

ETF Symbols on the NYSE Currency Symbol

Euro currency FXE
British pound FXB
Japanese yen FXC
Australian dollar FXM
Canadian dollar FXA
Swiss franc FXF
Swedish krona FXS

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