New ETF Tackles the Carry Trade

Currency exchange-traded funds of old are hedges against the dollar, but a new product from PowerShares and Deutsche Bank gives investors currency exposure that is designed to simplify the byzantine world of the interest rate-based carry trade.

The recently launched PowerShares DB G10 Currency Harvest Fund ( DBV) tracks the DB G10 Currency Futures Harvest Index, which follows the interest rates of the U.S. dollar, the euro, the yen, the Canadian dollar, the Swiss franc, the British pound, the Australian dollar, the New Zealand dollar, the Norwegian krone and the Swedish krona.

"When you ask whether it's a bullish or bearish dollar play, it's neither. It's really a currency strategy," says Kevin Rich, chief executive officer of DB Commodity Services, which is the managing owner of the Currency Harvest ETF.

"The index capitalizes on the trend that currencies associated with high interest rates, on average, tend to rise in value relative to those currencies associated with low interest rates," Rich says.

While the G10 index is a fairly new creation, the strategy is not. Investors have long used the "carry trade" to borrow currency in countries having low or zero interest rates, and to buy the currency-denominated assets in regions with high interest rates and higher returns.

To that end, the Harvest index looks at the three-month interest rates of the G10 currencies and goes long on the three with the highest rates and short on the three with the lowest rates. This gives investors a long-short strategy that the fund hopes will generate long-term returns from the currency markets.

"There's no other ETF out there that tracks a currency-yield strategy like this," says Rich, who hopes that interest in the fund will grow as investors better understand its strategy. PowerShares plans to work with investment advisers to help boost awareness about how the index operates.

"Up until this point, these strategies were available only to more sophisticated investors or from active managers who charged higher levels of fees," he adds.

Because of their low correlation with equities and bonds, currencies are often used to diversify portfolios. But forex transactions, involving either the currencies themselves or stocks traded on an overseas exchange, are often difficult and potentially very costly for investors.

"Once investors get the strategy, we think it should be a good investment vehicle for them as they look to get currency exposure -- as a diversity play or as an actual larger allocation in their portfolios," says DB Commodity Services' Rich.

Like many of the new crop of ETFs, the Currency Harvest fund gives retail investors access to a complicated trading strategy that has delivered high-net-worth clients big bucks, while making that strategy seemingly less complex.

Because it tracks an index, the ETF is very transparent concerning its holdings.

Total fees, including management, could be as high as 81 basis points per year, in line with many of the newer ETFs that act more like actively managed mutual funds. And compared with those funds, the costs of the Currency Harvest fund are competitive.

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