Real ETF innovation

abnormalreturns
May 12th, 2006

Longtime readers of this blog have noted our skepticism of the many new narrowly defined, me-too exchange traded funds that have reached the market. Random Roger who has been writing about the benefits of broad diversification and currency exposure, points out an article over at IndexUniverse.com that lays out the details of a new currency ETF. The DB Currency Index Value Fund (DBV) "…is a hedge fund … just one that follows a pre-set, automated, index-based trading strategy."

We point you to the IndexUniverse site to read all the details, but suffice it to say that this fund is innovative, rather than being me-too. The fund will attempt to exploit the long-standing observation that high yielding currencies tend to outperform, net-net, low yielding currencies. The failure of the concept of "uncovered interest rate parity" to hold remains an academic sticking point.

They note that the fund is at this point only in registration and will have a steep learning curve. However this represents a unique opportunity. Sure an individual investor could replicate the strategy with some effort, however in this case the scale of the fund will make the build vs. buy decision pretty easy. We will be watching this fund closely as it nears approval and launch. Stay tuned.