EXCHANGE TRADED FUNDS

Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs)

PART 1

Communication and Promotion Theory

Exchange Traded Funds (ETFs) is planning to launch the world's largest and Europe's first Exchange Traded Currency (Currency ETCs) platform with trading expected to begin next week. Currencies are the most liquid asset class with over $3.2 trillion of trading each day yet it is one of the last asset classes to be packaged in the form of an exchange traded product. ETF Securities is a pioneer of ETCs having launched the world's first Commodity ETC platform in Europe between 2003 and 2006 and which now has accumulated over $15 billion in assets and recent trading of approximately $1.4 billion per week.

Initially, 18 Currency ETCs will be listed on the London Stock Exchange (LSE) which will track recently launched MSFX Currency IndicesSM. The initial Currency ETCs provide long or short passive exposure to G10 currencies versus the US Dollar and include AUD, CAD, CHF, EUR, GBP, NOK, NZK, SEK and YEN. The ETCs also provide exposure to local interest rates in addition to FX movements between the relevant Currency and US Dollars. The new Currency ETCs will be fully collateralised in order to mitigate counter-party risk and will be listed in the ETC segment of the LSE. (Stacy 2008: 65-78)

Currency ETCs are intended for investors wishing to diversify their portfolio through the addition of a new asset class which has a low correlation with equities and bonds, or for those investors wanting to take advantage of tactical or strategic macro opportunities using the foreign exchange market. The table below shows that the returns of most major market currencies versus the US Dollar outperformed equities, bonds and real estate with lower volatility. For example, the MSFX Long AUD Index outperformed UK equities by 13.4, 55.4 and 37.2 percentage points over one, three and five years respectively with approximately 5% per annum of the total return over the five year period due to local Australian interest rates which have been incorporated into the MSFX Currency Index.

ETF Securities are launching the Currency ETC platform due to investor demand for secure, transparent and liquid exchange traded products. With Commodity ETC assets having nearly tripled in 2009 and volumes having doubled, it is clear that investors have widely accepted the ETC structure as a vehicle of choice for exposure to commodities. This is now been extended to include currencies.

Similar to Exchange Traded Funds (ETFs), ETCs are liquid, accessible and simple. ETCs can be created and redeemed on a continuous basis by market makers, matching the tremendous liquidity of the underlying foreign exchange markets and can be traded by investors on a regulated exchange in the same way as any equity. Currency ETCs will provide accurate and transparent currency exposure to recognised benchmarks in a single trade. In addition, Currency ETCs require no foreign currency account and no trading or management of futures/forward contracts as ETCs are simply priced off new currency indices published by Morgan ...