ETF Securities will unveil Europe’s first exchange-traded currency platform next week, giving investors the opportunity to tap into the foreign currency market.
As the pioneer of exchange-traded commodities it will now launch 18 currency ETCs that will track the Morgan Stanley Foreign Exchange Indices (MSFX).
The currency ETCs will be listed on the London Stock Exchange (LSE), enabling investors to buy and sell through their own brokerages or through institutional managers.
ETF Securities continues to make headway into the exchange-traded funds industry at a time when investor sentiment has become more risk-averse. Its latest offering is the last of the asset classes to be packaged in the form of an ETF.
“We’ve been working on this for quite a while, but the recession had diverted our attention. Investors have now become more conservative with new products, so it has taken extra time to explain the benefits of an ETC,” said Nik Bienkowski, chief operating officer at ETF Securities.
More recently, ETFs have risen in popularity as regulators continue calling for increased transparency in the markets.
Unlike other structured products such as derivatives, ETFs are not intended to outperform the market.
Similar to ETFs, the currency ETCs will aim at replicating the movements of G10 currencies. In addition, they will be listed on an open exchange and can be bought and sold at any time.
Although currency ETCs and ETFs share a similar structure in that they both track a specific index, there is one technical difference: currency ETCs are collaterised to reduce counter-party risk. This means that if Morgan Stanley were to fail, for instance, investors would be fully protected.
ETFs are also funds while ETCs are debt securities issued by a segregated issuer, however ETFs and ETCs function in the same way.
“The benefit of a currency ETC is that it provides exposure to local interest rates. It’s safer than putting money in a foreign bank account,” Mr Bienkowski said.
“Foreign accounts would be subject to a spread between 2 and 3 per cent, as well as other entry and exit fees. Whereas the spread on a currency ETC would be around 0.2 per cent.”
The spread is the difference between the selling and buying price.
With over $3,200bn (£1,980bn) worth of currency trading each day, it is considered the most liquid asset class.
Nicholas Brooks, head of research and investment strategy at ETF Securities, said ETCs will give investors more flexibility and diversity in their short or long-term portfolio strategy.
“Investors can play towards a common theme. For instance, those who are bearish on the sterling or have a negative view of the US dollar could buy a long Euro short USD ETC.”
But most attractively, ETFs, including currency ETCs, are cheaper to hold than actively managed funds. Some ETFs charge a total expense ratio (TER) as low as 0.3 per cent.
However, Mr Bienkowski concedes that while ETFs are cost-effective, investors are still subject to a brokerage commission every time they place a trade. And because the ETF industry in the UK is relatively new, “it has taken some time to educate and train investors on why ETFs are a safer and better choice.”
But with every new venture comes challenges. And both Mr Bienkowski and Mr Brooks expect the ETF industry to grow over the next couple of years, as investors and fund managers become increasingly more aware of its benefits.
