I just bought shares in the Market Vectors double short Euro ETN (symbol DRR).  ETN stands for exchange traded notes, which according to the website are “senior, unsecured debt securities issued by Morgan Stanley that deliver exposure to the exchange rate of foreign currencies.”  I have been a believer in a strong dollar recovery for quite some time, and the DRR is another instrument available to capitalize on it.   It is relatively new, with its inception date earlier this year on May 6, 2008.  I wrote about other ways to play the dollar recovery several months ago:

In that article, I mentioned several justifying factors for a strong dollar recovery, and those factors have led to a significant dollar bull market since that time.  I also mentioned a few ways to play the dollar recovery.  The Market Vector’s double short euro ETN (DRR) is a recent discovery.


Over the last few years, the dollar has been absolutely hammered for justifiable reasons – huge trade and budget deficits, plus lack of leadership to present a plan to rectify the imbalance.  But despite the fiscal recklessness within the United States, it is important to note that currencies only trade in relation to other currencies.  It was easy for traders to ignore problems in the rest of the world and focus on the weaknesses in America.  But the dirty laundry has come home to roost in Euro-land, and traders around the world are finally waking up to smell it, and punish the euro accordingly.  Among the european zone problems:

  • Rising unemployment
  • Falling manufacturing growth
  • Tumbling real estate markets (Despite common belief, reckless lending did occur in Europe too!)
  • Europe aggressively cutting interest rates
  • European bank failures and bailouts
  • Debt to GDP ratios that make America look responsible – From Nationmaster, the United Kingdom debt per GDP ratio is a staggering 387%.  France has a ratio of 173%, Germany 144%, Greece 148%, Ireland 758%, Italy 117%, and Finland 135%.

There are certainly more direct ways to play the currency markets on the Forex, but I do prefer the convenience of doing so with ETF’s or ETN’s.  But I also recognize that there is more risk in trading currency ETF’s and ETN’s as compared to trading directly on the Forex.  The DRR fact sheet lists out several of the risks associated with the double short euro ETN, including:

  • Leverage risk – double exposure magnifies losses as well as gains
  • Currency risk
  • Non-diversification risk – susceptible to single market events
  • Tracking risk – high volatility and effects of interest rates in the U.S. and Europe
    may cause Index return to deviate from a 2X leveraged short exposure to the spot exchange rate
  • Issuer default risk – not secured debt; subject to credit risk

The last one is the one that shines out most, and is also the reason that I’m very careful with these ETN’s.  Just two years ago, it was simply inconceivable to most people that Lehman, Bear Sterns, AIG, Morgan Stanley, Goldman Sachs or other big name financial firms would face risk of collapse.  Morgan Stanley has escaped collapse thus far in the financial crisis, but they are certainly not in the clear as far as I’m concerned.   If Morgan Stanley goes under, there is a strong possibility that shareholders in DRR could be wiped out, regardless of the direction of the euro.  If you can’t handle that possibility, then stay away from these derivative currency plays.

Disclaimer: Trade at your own risk.  Nothing in this post, or anything at Geldpress shall be considered investment advice.