Friday, July 21, 2006

A currency share of blue sky

I don't see the attraction of the currency ETFs. Each of the currency ETF's consists of 100 units of the base currency deposited in a savings account with the London branch of JPMorgan Chase Bank. Each deposit account will pay slightly less than the currency overnight interest rate (0.27% less for Euro shares (FXE), 0.40% less for the Swedish Krona trust (FXS) ). On top of being paid less than normal deposit rate, you get the added indignity of paying 0.40% in fund expenses.

Take heed of what the fund prospectus grimly notes:

Neither the Shares nor the Trust’s two deposit accounts maintained by the Depository and the Swedish Kronor deposited in them are deposits insured against loss by the Federal Deposit Insurance Corporation (FDIC) or any other federal agency of the United States or the Financial Services Compensation Scheme of England.

To me, it makes more sense to stick your cash in a savings account with a US Bank, guaranteed by the FDIC. For example, One United Bank offers 5.25% on savings accounts. With an online savings account: you pay no fees to deposit or withdraw cash, and your money is protected by the full faith and credit of the United States.

Why take on the risk of currency fluctuations while earning less interest than a risk free assets? No one has yet come up with a convincing reason for why this is a good idea. The raison d’etre of cash investments is that they are liquid and safe. Currency ETFs are liquid and unsafe. These funds are strictly for speculators and collectors of financial gadgets.

If you absolutely must have direct forex exposure, (which for most people IMHO is needless noisy risk) then something like the PIMCO unhedged foreign bond fund makes more sense. You will have more diversification across currencies, and earn a higher interest rate than most of the currency funds after expenses.


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