Two New Ways to Play Currencies

Foreign exchange is primarily an over-the-counter market. About $2 trillion a day in transactions are conducted primarily over telephone and computer lines, with banks still the primary market makers. However, new participants have come to the market in recent years.

Because of the relatively low entry barriers, high leveraging ability and an intensified search for greater diversification, there appears to have been a dramatic increase in smaller participants in the foreign-exchange market, especially hedge funds and commodity trading advisers. In recent weeks, two new exchange-traded currency products have been launched that the individual investor can use.

The first is a fund called the Euro Currency Trust (FXE - commentary - Cramer's Take), which trades on the New York Stock Exchange. The trust's objective is to reflect the price of the euro. Each share represents 100 euros, held in London, plus accrued interest. The yield is tied to the euro's overnight index average, out of which fees (0.27%) are paid. The expense ratio is 0.4%.

Rydex Investments is sponsor and manager of the trust, and it has a similar structure to other ETFs that in effect "equitize" a nonequity investment, such as gold. The Euro Currency Trust was launched in late December. In its first 13 days of trading, through Jan. 13, daily volume averaged about 130,000 shares, representing notional value of about $15.6 million.

The second new forex product is a euro index futures contract launched by the New York Board of Trade last week that is based on a trade-weighted basket. It includes currencies of five of the euro-zone's trading partners: the U.S., the U.K., Switzerland, Japan and Sweden. It is a microcosm of the 23-currency basket the European Central Bank uses to calculate the single currency's nominal effective exchange rate. The contract will trade in New York and Dublin and will have a quarterly expiration schedule (March, June, September and December).

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.