Carry Trade ETF

Overview:

In 2006 Deutsche Bank (DB) brought a new product to market – an exchange traded fund (ETF) based on the carry trade, a strategy of buying and selling currency futures.

The Deutsche Bank ETF allowed individual investors to participate in a strategy that previously had been available only through hedge funds or direct purchase of currencies and futures. It was developed at the Deutsche Bank AG New York's Global Currencies & Commodities Group, led by Yale SOM grad Kevin Rich and marketed by PowerShares. The product was launched in September 15, 2006, under the ticker DVB. It traded initially on the American Stock Exchange (AMEX). (As of October 2008 the American Stock Exchange was acquired by NYSE Euronext (NYX) and rebranded as NYSE Alternext.)

The ETF brought several novel features to the market: it was a dynamic trading strategy packaged as an ETF, so it was available to small investors who would not have access to trading futures and could not invest in hedge funds. It was futures based, and – aside from commodity indices – there were few ETFs based on futures. In addition, it provided investor diversification, since there was a low correlation of returns of this ETF to stock and bond returns. Finally, the fund's holdings and investment strategy were completely transparent to the market.

The offering received the William F. Sharpe Indexing Achievement Award for “Most Innovative Index Fund or ETF” at the 2006 Sharpe Awards. These awards are presented annually by IndexUniverse.com and Information Management Network for innovative advances in the indexing industry. The carry trade ETF shared the award with another DB/PowerShares offering, a Commodity Index Tracking Fund. Jim Wiandt, publisher of IndexUniverse.com, said, "These innovators are shaping the course of the index industry, creating new tools and providing new insights for the benefit of all investors."

What was it that made this financial innovation successful?

Format:
Raw, online
Teaching Note:
No
Suggested Citation:

K. Geert Rouwenhorst,  Jean W. Rosenthal, and Jaan Elias, “Carry Trade ETF,” Yale SOM Case 8-056, August 25, 2008

Keywords:
  • Currency
  • Bank
Perspectives:
  • Innovation & Design
  • Investor/Finance
  • Macroeconomics
  • Sourcing/Managing Funds