New forex product tries to compete with ETFs

Exchange-traded funds (ETFs) are available on a wide array of products, but Barclays is entering the world of alternative forex instruments with the introduction of three foreign currency “exchange-traded notes” (ETNs). Barclays launched ETNs — which function like ETFs in that they can be bought and sold on a stock exchange through a stock account — on the British pound, Japanese yen, and euro vs. the U.S. dollar.

The euro (ERO), pound (GBB), and yen (JYN) exchangerate ETNs began trading on May 9. Volume on the trio was light in the early going — average daily volume was in three digits. For traders looking to take advantage of moves in the U.S. dollar exchange rate without delving into currency futures or spot currency, there is virtually no difference between an ETN and an ETF. ETNs are backed by senior debt notes; ETFs invest in an underlying instrument. Theoretically, if Barclays goes bankrupt, owners of ETNs could lose some or all of their money.

The big difference could be in the tax treatment of the two products. Currency ETFs pay out interest income monthly, which is taxable. ETNs are only taxed when the shares are sold. However, the income payment is more attractive to longer-term traders and investors looking for monthly income. Additionally, Barclays believes the ETNs qualify under derivatives rules that would allow for long-term gains to be taxed at a maximum rate of 15 percent. However, the IRS has not yet made an official ruling. For more information on ETNs, visit http://www.ipathetn.com/exchange-tradednotes-overview.jsp.