ETNs Joining ETF Frenzy with Currency
May 17th at 1:00am by Tom Lydon
The number of exchange traded funds (ETFs) listed on U.S. exchanges passed the 500 mark. And now their cousins, the exchange traded notes (ETNs), are going mainstream. Barclays manages the ETNs and recently added three new ones, focusing on currencies, to existing commodity and India ETNs. This brings the total ETNs offered to 7.
The currency ETNs will provide exposure to the movement of the euro, Japanese yen, and British pound, relative to the U.S. dollar, reports John Spence for MarketWatch.com. The new ETNs are:
- iPath EUR/USD Exchange Rate ETN (ERO)
- iPath GBP/USD Exchange Rate (GBB)
- iPath JPY/USD Exchange Rate (JYN)
Barclays isn’t the first to offer currency products, in 2005 Rydex launched the CurrencyShares ETFs and currently offers 8 of them. Both Barclays and Rydex seek to capture currency moves versus the U.S. dollar, but they achieve this in different ways.
For the ETNs, Barclays promises to pay the index return plus any interest. They take on the risk of an index tracking error, but investors take on the credit risk that Barclays will remain solvent. Investors are taxed once on gains and interest when they sell shares or when the security matures. With ETFs, investors are buying a piece of the portfolio. CurrencyShares pay interest monthly, which is taxed at ordinary income. Any gains in the ETF due to currency moves are taxed at the ordinary rate.
Read the disclosure, as Tom Lydon serves on the board of Rydex Funds.
