Caught this in yesterday’s news:

Morgan Stanley has teamed up with Van Eck Global to launch currency exchange-traded notes offering exposure to the Chinese renminbi and the Indian rupee. The Market Vectors – Chinese Renminbi/USD ETN (NYSE Arca: CNY) and Market Vectors – Indian Rupee/USD ETN (NYSE Arca: INR) are the first exchange-traded products to offer exposure to those two currencies. They launched today on NYSE Arca.

The notes are designed to go up in value when the named currency appreciates against the U.S. dollar, and down when the dollar strengthens. The ETNs are underwritten by Morgan Stanley, and Van Eck is the marketing agent. The notes charge 0.55% in annual fees.

Full details are on Yahoo Finance.

The securities are already live and trading.  Here is a quote for the Market Vectors – Chinese Renminbi ETN (CNY), here is a quote for the Market Vectors – Indian Rupee ETN (INR).

There are a few details that are worth noting.  ETNs, or Exchange Traded Notes, are a relatively new innovation in indexes, and as a result, there are some grey areas around their long-term tax treatment.  Both notes do not actually own the currency.  Instead, you are buying a promise, from Morgan Stanley, that they will pay off a return on investment that matches the return on investment of an index that is tied to the currency.  Got it?  Yes, it’s two levels of indirection… almost like a HANDLE to the currency.  (Bonus points to old-school Mac developers who get the reference.)

Here are three caveats from the article:

First, unlike most currency products, they earn interest based on the U.S. Federal Funds interest rate … not local interest rates.�(Although they are currently similar.)

Second, these ETNs do not pay out interest income – instead, it is added to the share value of the note.�That creates a problem for investors, as the IRS has said that investors must pay taxes each year on this notional interest … even though they won’t realize the gains until they sell the note.

Finally, ETNs are debt instruments, which means investors are exposed to the credit risk of the underlying bank. Morgan Stanley seems sound, but the current market environment could give people pause.

This is an interesting option, but likely only appropriate for tax-protected accounts.  Personally, I still have a soft spot for Everbank, and it’s currency-based bank notes, CDs, and money market funds in different world currencies.