Tag Archives: ETPs

Stepping on the brakes

Much like other structured products that came of age during the past decade, the market crash of 2008 was the first serious test of how exchange-traded funds would react in a bear market. But while the surge in issuance has continued in Europe and Asia, growth rates in the US have slowed.

The exchange-traded funds (ETFs) industry outside the US has surged this year, with 253 funds launched by the end of September, a 69% increase on the same period last year and a figure that is already 27% bigger than all ETF issuance in 2007. During the two months to September 30 – one of the worst periods in recent stock market history – 83 ETFs were launched bringing the total to 1,499 funds on 43 exchanges worldwide, while assets under management hit $764.08 billion. Barclays Global Investors expects this figure …

This was originally published in Structured Products. For the full article click here.

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Not Nyet, Barney Ruble

ETF firms have had a rough time over the past year. Launching new products during a major market meltdown is problematic. Investors watching their investments plunge in value are hardly looking for new products to invest in. Innovative products all around have been smeared with the scandal and dirt coming off of derivatives such as credit default swaps. And if investors are looking at ETFs, they are moving toward more conservative investments. They aren’t necessarily willing to take a risk on some new index of an obscure sector or other out-of-the-box ideas.

So, it’s into this atmosphere that Rydex Investments launched the latest in its CurrencyShares family of exchange-traded products, or ETPs. On Thursday, Rydex’s CurrencyShares SM Russian Ruble Trust (XRU) began trading on the NYSE Arca. This new ETP is the first to offer time currency exposure to the Russian economy by tracking the daily price movement of Russia’s currency, the ruble, in U.S. dollars.

It couldn’t have come at a worse time. The ruble has been in a sharp decline as the Russian stock market and economy enter a freefall coinciding with the plunge in oil prices. The day before the ETP launched, Russia’s central bank spent $2 billion to defend the currency. According to the Wall Street Journal, on Tuesday, the Russian central bank “widened its target band for the currency’s rate against a dollar/euro basket by about 1% in each direction. Investors quickly pushed the ruble to the lower limit.” This move reversed “weeks of rigid defense that fueled a $112 billion decline in reserves since the summer.” Then on Thursday, Russia’s two chief stock exchanges were shut down after stock prices plummeted.
WSJ quoted Renaissance Capital economist Alexei Moiseyev saying, “Today’s move achieves nothing.” The modest decline in the ruble “has only served to raise market expectations of a further devaluation.” While industry leaders want to let the ruble weaken further to lower the cost of Russian exports, while increasing the prices of imports, government officials rule out a sharp devaluation. Such a move could send the nation into a panic.
The eight CurrencyShares ETPs track the euro, Australian dollar, British pound, Canadian dollar, Japanese yen, Mexican peso, Swedish krona and Swiss franc. They are pure plays against one currency, and they trade like a regular ETF, with shares on a stock exchange. This is a big improvement over investing in the forex market. That popularity can be seen in the approximately $2.2 billion in assets under management they have acquired. This is 45% of the industry’s total currency ETP assets, according to Citigroup Global Markets’ Oct. 31 ETF Flow Report.

Over the past three years, the CurrencyShares have been a very popular way for investors to profit on the falling U.S. dollar. But with the dollar’s recent rise, suddenly, it’s not such an easy trade. Of course, Rydex couldn’t have predicted oil prices would plunge when it filed to register this ETP with the SEC more than six months ago. Still, the mantra among ETF companies is that there is a demand for these products because investors are requesting these funds. It might be time to stop listening to these investors.