Don't Confuse Currency, Commodities ETFs

NEW YORK (TheStreet) -- The Wall Street Journal misunderstood the nature of some currency ETFs in a story last week that compared the WisdomTree Dreyfus Chinese Yuan Fund(CYB) with U.S. Natural Gas(UNG).

The article concluded that a buyer of CYB may not realize the gain in the Chinese yuan because speculators have already bid up the price of yuan forward contracts.

When UNG rolled its contracts this summer, it paid a steep premium between the contract it was holding and the near-month contract it wanted to buy. Each time UNG sold, it depressed the price of the contract it was selling and increased the price of the contract it bought. Other factors contributed to a situation whereby the spot price of natural gas was much lower than the contract prices for futures further out in time.

In the case of CYB, the premium it pays is not due to the fact that it rolls its contracts monthly, but rather that traders believe the Chinese currency will appreciate. CYB is not losing money every time it rolls the way UNG did. There is a premium in the currency market for yuan.

A commodities trader could purchase a 2010 futures contract and mitigate contango (while taking on other risks), but a currency trader cannot escape the premium for yuan.

In any event, it is incorrect to think of currency forwards in the same way as commodity futures. There isn't contango (when the near-month contract costs more than the current contract), nor backwardization (when the near-month contracts are cheaper). Most often, the difference in the contract prices is a result of the implied rate, or the interest-rate differential between the two currencies.