How To Play China’s Currency With ETFs Or ETNs

Are you one of the many investors interested in China’s investment opportunities? Besides single-country exchange traded funds (ETFs), a way to play China’s markets is through its currency ETF or exchange traded note (ETN).

The Chinese yuan has been allowed to slowly appreciate against the dollar, but the government still keeps a tight rein on it so it doesn’t veer too far from the dollar, writes Murray Coleman for IndexUniverse. Many see this as a way to deliberately lower market rates as a way to keep up the country’s exports.

If you believe China will continue to relax its hold over its currency, then investing in the yuan could prove to be worthwhile. Two funds currently target the Chinese yuan: WisdomTree Dreyfus Chinese Yuan (CYB) or Market Vectors Renminbi/USD ETN (CNY).

CYB follows forward currency contracts to access ultrashort-term Chinese bonds and CNY tracks an index of nondeliverable yuan forward contracts. CYB is actively managed and the managers try to find the best forward contracts with 1- to 3-month maturities. CYB has an expense ratio of 0.45% and CNY is 0.55%.

Two major differences exist between the funds:

• The structure. CNY is an ETN whereas CYB is an ETF. CNY is a debt instrument issued by Morgan Stanley (MS), so investors are exposed to credit risks of the underlying bank. ETFs like CYB have given investors the opportunity to lower expenses, add greater diversification to portfolios and provide better returns with lower risk.
• How an investor gets income. CYB makes quarterly income distributions, whereas CNY does not pay out interest income. Any income an ETN receives is added to the share value of the note, which could create problems for some because the IRS has ruled that investors should pay taxes each year on notional interest.

• WisdomTree Dreyfus Chinese Yuan: up 2.1% year-to-date

• Market Vectors Renminbi/USD ETN: up 2.5% year-to-date

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