As exchange traded funds (ETFs) become increasingly sophisticated and target new and interesting markets with unique strategies, it’s growing more and more important to understand the differences between them.
A case in point: while both WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB) and United States Natural Gas (NYSEArca: UNG) use forward contracts, they differ in how they work.
Don Dion of the Street.com has an excellent piece that explains the differences between the two ETFs and how they handle futures contracts. He states that a premium found in CYB is caused by factors that differ from those that led to a premium in UNG.
This summer, UNG paid a premium between the contracts it was selling and those that it was buying. Each time UNG sold a contract, it sent the price of that contract lower and raised the price of the contract it was buying.
In CYB, the premium it pays is because traders believe the Chinese currency will appreciate. (Read our special report on currencies). Already this year, CYB is up 1.8% this year – more than the 1% the currency itself has gained.
Commodity investors can alleviate contango by buying a 2010 futures contract, but currency traders can’t get around the premium for the yuan. (What’s contango?)
Other factors in this issue include:
- Speculative demand. If traders believe a currency will gain, they’ll bid up forward contracts.
- Storage issues. Higher futures prices are based on the costs of storage; currencies don’t need storage, so this issue is moot for them.
For more stories on currency ETFs, visit out currency ETF category.
For full disclosure, Tom Lydon’s clients own shares of UNG.
Kevin Grewal contributed to this article.