Weak-Dollar Play: New 'ETN' Could Shine

Barclays has come up with a new way to profit from a weak dollar that promises higher returns and lower taxes than conventional exchange-traded funds, but there are also some significant risks to consider.

Last week, the U.K. bank rolled out three exchange-traded notes -- a kind of senior, unsecured debt -- linked to the performance of the euro, British pound and Japanese yen relative to the U.S. dollar.

The iPath EUR/USD Exchange Rate ETN(ERO Quote), iPath GBP/USD Exchange Rate ETN(GBB Quote) and the iPath JPY/USD Exchange Rate ETN(JYN Quote) trade on the NYSE.

Currencies have been gaining respect as an asset class. They can be used for diversification, due to their low volatility and low correlation to other markets. U.S. investors can hold foreign money to protect their portfolios from a weakening dollar.

ETFs, which resemble index mutual funds but trade on an exchange like stocks, are a popular way to get involved in the market. Rydex has launched eight currency-based ETFs since December 2005, including the popular CurrencyShares Euro Currency Trust(FXE Quote), which in April reached $1 billion in assets.

Unlike CurrencyShares, which hold hard currencies, the new Barclays iPath products are notes from the bank promising to pay you a return based on movements in the exchange rate between the two currencies. If you take a long position in the GBP/USD Exchange Rate ETN and the value of the pound goes up versus the dollar, you make money. You can short the ETN if you expect the dollar to get stronger instead. The funds based on the euro and the yen work the same way.