Currency ETFs Gain Traction

For years, big investors have used exchange-traded funds that track major equity indexes to jump in and out of the stock market. Now some newer ETFs that track currencies are coming into their own as trading vehicles, too.

Rydex's 22-month old CurrencyShares Euro Trust(FXE Quote), which has nearly $1 billion in assets, was the first currency ETF to attract a significant following. It now has a close rival, the CurrencyShares Japanese Yen Trust(FXY Quote). Rydex says assets in the seven-month-old ETF are surging as investors use it to capitalize on the falling dollar and the unwinding of the carry trade.

For the third quarter through Sept. 20 the ETF has pulled in $332.4 million of new money, or 67% of the $490 million in assets it held on June 30.

Including capital appreciation, total assets for the Yen Trust surged 77% through Sept. 20 to $866.2 million.

Barclays' iPath JPY/USD Exchange Rate(JYN Quote) is also benefiting from the yen's appreciation. The exchange-traded note, which debuted in May, pulled in $25.3 million for the third quarter through Sept. 20. It has total asset of $87 million.

"That's pretty significant," says Ron Delegge, editor and publisher of ETFguide.com. "To get that kind of flow into a product like this says that these types of products are gaining acceptance in the market place as hedging instruments."

Both products are benefiting from well-timed launches. For years, investors have profited by borrowing yen at very low interest rates (the Bank of Japan's overnight rate is currently 0.5%) and converting the money into dollars in order to buy higher-yielding assets such as U.S. equities or bonds. They pocket the difference, or spread, between the interest rates paid on the borrowed money and the return on their investments.