Tuesday, March 25, 2008

Falling U.S. Dollar Impetus behind 3 New Barclay ETNs


Saying investors continue to believe the U.S. dollar will continue falling, managing director for Barclay Global Investors, Philippe El-Asmar, said the company will be rolling out three new ETNs in the near future to take advantage of that expectation.

The three new exchange-traded notes will track currencies in emerging markets, the Middle East and Asia.

Investors have already bought in, as the combined notes have generated $150 million in investment, with a month left before the official launch, said El-Asmar.

The names of the new ETNs will be Global Emergin Markets Strategy, Asian and Gulf Revaluation and Intelligent Carry Index ETN.

The Asian and Gulf Revaluation ETN will track Asian and Middle Eastern currencies pegged to the U.S. dollar: Saudi Arabian riyal, the yuan, Hong Kong dollar, Singapore dollar and United Arab Emirates dirham.

With the high price of oil and assumed long term trend of a falling U.S. dollar, it is thought these countries may end up revaluing their respective currencies.

For the Global Emerging Markets Strategy ETN, they'll track 15 currencies through money markets in Latin America, Asia and Eastern Europe.

The Intelligent Carry Index is built to offer market-neutral returns, and will track the 10 most liguid currencies in the world.

Carry trade simply means an institution borrows in one countries with low interest rates and then invests the borrowed funds into countries offering higher interest rates.

The ETN is looked upon as a debt instrument by the Internal Revenue Service, and in a recent ruling in December the IRS determined that single currency ETNs will be taxed as debt.

What that means is they could be taxed at a 35 percent rate rather than the 15 percent enjoyed by long-term capital gains instruments. It taxes will apply even if there's no realized gain, i.e. even if you the notes aren't sold yet.

A ruling on tracking indexed or baskets of currencies hasn't been made yet, so at this time the taxation element in the investment isn't known.

If someone were to invest in these, they would have to take into account the possibility that the ETNS tracking more than a single currency may end up being taxed at the same rate. If that's so, someone could get stuck with high taxes while still holding the notes.

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