Wednesday, October 3, 2007

The Expensive Truth About Rydex Currency Shares ETF's

Over the past couple years Exchange-Traded Funds have been popping up quickly; first they appeared in the general areas of the market, and now they are moving into the niche markets. In the past year, Rydex has introduced eight new ETFs, known as CurrencyShares, into the market. These ETFs focus purely on currency.

* CurrencyShares Euro Trust (Ticker: FXE)

* CurrencyShares Mexican Peso Trust (Ticker: FXM)

* CurrencyShares Swedish Krona Trust (Ticker: FXS)

* CurrencyShares Australian Dollar Trust (Ticker: FXA)

* CurrencyShares British Pound Trust (Ticker: FXB)

* CurrencyShares Canadian Dollar Trust (Ticker: FXC)

* CurrencyShares Swiss Franc Trust (Ticker: FXF)

* CurrencyShares Japanese Yen Trust (Ticker: FXY):

According to the Rydex Prospectuses, the ETFs allow investors to buy into a trust denominated in the particular currency that bears interest according to that currencys particular interest rate.

These funds seem to hit the market at the perfect timeright at the turning point of further US Dollar depreciation. In the year and a half since the introduction of the CurrencyShares Euro ETF (FXE), the US dollar has depreciated roughly 13% against the Euro December 13, 2005, and the Euro fund has increased about 12.5% which reflected by this currencys pattern. Most investors would consider that a respectable return, especially with an asset class that historically has had little correlation to domestic equity returns.

Smoke and Mirrors

Rydexs CurrencyShares carry a .40% expense ratio for the privilege to invest in the particular currency. The expenses are paid out of the interest (if the interest rate exceeds the .40% expense ratio) that is received on the account; therefore, the investor is oblivious to the actual cost of ownership.

For instance, an investor feels that the Euro would be a good investment in the long run, so he/she takes a long position in CurrencyShares Euro Trust (FXE). Suppose that this investor wanted to buy $100,000 worth of Euro; today he would effectively be going long 74,900. The Euro is currently yielding 3.54%, which comprises the fund, and the .40% expense ratio would be deducted from the interest payments on the Euro currency holdings. While the investor is receiving about $3,540 in interest per year from the position, he is paying about $400 in expenses per year because of that .40%, leaving him with an interest gain of about $3,140 per year. According to the fund fact sheet, Because CurrencyShares will be traded as securities, transaction costs will be substantially reduced compared to currency spot market transactions. This statement, however, is not true in all cases and is very misleading to investors who feel that currency would be a good holding in their portfolios.

The Low-Cost Alternative

Over the past few years, the emerging market of Foreign Exchange (FOREX) has been gaining a lot of recognition and respect, and many brokers today focus purely on trading in this new and up-and-coming global market, helping investors to easily reap the many advantages. The FOREX market is the most liquid market in the world, with about $2.7 trillion traded per day, and it is available to trade 24 hours a day.

If an individual investor were to take that same $100,000 long Euro position directly through a FOREX broker, he would be able to reduce expenses dramatically by about 98%. He would still be going long 74,900, but this time without the .40% expense ratio. The only cost to initiating the position is the spread cost, which on the major currencies is usually only one to five pips. In this case, the spread cost to initiate this position would be around $9.00, which would roughly be the same as the broker commission to buy into the currency ETF. After this initial cost, there are no further expenses for the investor to pay. The spread costs will differ among FOREX brokers; therefore, a trader should shop around for the best spread cost and interest rates.

If the investor were to take the position through the FOREX broker, he/she would be able to yield about 3.40% per year, which would give the investor roughly $260 more in interest than the CurrencyShares Euro Trust. The lower interest rate received of 3.40% is because on the currency transactions there is spread on the interest rate. The broker keeps this, which is similar to what banks do when they pay out interest on deposits and lend out money at a higher rate.

Another benefit that comes with investing directly through a FOREX broker is the ability to leverage the equity in your account. Each FOREX broker is different in the amount of leverage that an investor can use, but typically it is around 50 times the account equity. FOREX brokers offer this type of leverage because when trading currencies, an investor is effectively buying (investing) one currency and selling (borrowing) another simultaneously. In the above examples of going long the Euro, the investor is actually going short the US dollar. An investor should have a good understanding of the market before engaging in leveraged currency transactions; every investment should be an educated investment.

So, Whats Your Point?

The Rydex CurrencyShares ETFs have extraordinarily high expenses considering the type of product they are offering and the relatively low barrier to entry into trading the actual product directly in the FOREX market. They are able to rebalance their currency holdings with little transaction expenses into an always very liquid market, which is often difficult for equity ETFs to do.

ETFs can be incredibly helpful. When comparing the total cost it would take for an individual investor to buy into the individual stocks that comprise the S&P 500, and the total cost to buy into a currency, it is easy to understand why there are ETFs for the former. But the latter, as shown above, has very little cost to initiate; a currency trade is fairly easy and inexpensive, yet the Rydex CurrencyShares ETFs charge more than four times the expense ratio than that of ETFs that trade the S&P 500. Its ludicrous!

The amazing fact about the CurrencyShares ETFs Family is that they now boast $1.7 billion in Total Net Assets in their eight funds. I guess it goes to show that in a booming market, people will buy anything, just as long as they hear the right pitch.

Bryan W. Moore is a senior Finance Major at the Indiana University of Pennsylvania. He is the founder and writer at is site that is devoted to presenting innovative investment strategies using stock, options, FOREX, ETFs and Mutual Funds. He is also the Portfolio Manager of a $200,000 student investment portfolio, information about the fund can be viewed at

Pros And Cons Of Stock Trading

Whenever a company issues stocks, it is an attempt to raise capital in order to invest in some endeavor. All over the world the stock market works on this basic premise. When a company needs money, it will simply offer the stock and the options thus purchased will entitle the stock holders to a percentage of the profits, once the entire concern gets going.

The Internet has made things much faster and removed all geographical restrictions. Trading now takes place 24/7 because some part of the world is always busy with business. The Internet also makes it easier for anyone to take part in stock trading. Leading stock market firms also send daily emails with tips to their customers on how the market is expected to move today.

Every one has heard about stock trading but very few people actually know of the advantages of getting involved. Like any business venture, stock trading is not all advantageous and it is important to know both the pros and cons of stock trading.


Instant Returns

Active stock trading means you get almost immediate return on investment. You get better returns in a short time as opposed to buying and holding your investment for years at a stretch.


Through the Internet you can trade in any part of the world. You have no restrictions on the type of stock you trade in or what currency you trade in. You can browse the Internet looking for constantly moving stocks.


You already know most of the companies offering stocks so you are not on strange ground. With a little time you can understand the micro dynamics to trade effectively.



Stock trading leverage is very low when compared to Forex trading or futures trading.

Short selling

There is a rule against short selling that entails waiting before the price picks up again. This essentially limits the amount of profit a trader can make. There is no such constraint in Forex trading.


There is a substantial cost associated with stock trading that is unique to this market. This can quite often make stock trading impossible for almost everyone. You will need some amount of money before you can start investing in the stock market.

All trading stock, Forex, futures, involves some amount of risk with their own sets of pros and cons. It is up to you as a trader to evaluate all these issues before you begin trading.

Alan King is a writer that concentrates on helping people better themselves, for cutting edge information you NEED to know about stock trading before you try to cash in on this multi TRILLION dollar industry I strongly suggest that you check out my friend Mark Crisp's awesome free 9 page e-book at

Forex Mentors, Gurus, Advisors Should You Buy Advice?

There are plenty of people on the Internet keen to sell you advice and be your forex mentor or guru but most of the advice sold is not worth the money.

There is a huge industry in selling e-books, courses and systems, yet only a few are any good.

Lets find out how to separate the good from the majority that will simply help you lose.

1. The obvious first question to ask

Yet most forex traders dont bother asking this question yet its critical!

If you want to get rid of over 90% of the Forex mentors, gurus and advisors ask this obvious question:

How much money has been made following your advice can I see the real time track record please?

Most sellers of information like to say how successful they are getting them to prove it!

Most will dodge this question or give you a few testimonials (lucky trades or from friends or a hypothetical track record.

A hypothetical track record is done in hindsight KNOWING the price history!

Well anyone can do that thats why you dont see one that loses.

Ask for the real time track record that is all what counts real dollars made in the market.

It amazes me that people buy advice without checking if it has made money.

If there is no track record dont buy the advice.

2. Look for the method to be simple and fully revealed

You should not simply follow a system or signals given to you.

You need to understand the underlying logic it is based upon.


Because if you dont understand it, you wont have confidence in it and will lack the discipline to follow it through inevitable losing periods.

3. Look for a satisfaction guarantee

If you are buying something based upon sales copy you need to be sure that the hype matches the reality when you receive your advice.

Most reputable system or advice sellers will give you one that gives you the comfort that they are prepared to refund you if you are not happy.

Never buy a system unless you get one.


There is some good advice out there and there are some good systems that are sold but theyre in the minority so take your time to seek one out that you understand has good support and above all - make sure it has made real money in the market before parting with your hard earned cash.


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