Rydex is no longer alone in arming fund traders playing the currency speculation game. The WSJ's Fund Track column picks up on Barclays Bank and its new iPath exchange currency notes (ECNs). The notes take aim directly at the niche carved out by Rydex in last year. Since Rydex debuted its CurrencyShares ETFs in December 2005, they have taken in more than $1 billion of assets in eight products.

A billion is small potatos for Barclays Bank, though, as the London-based bank is already the marketshare leader with its iShares family of exchange-traded funds (ETFs). The three new Barclays products -- iPath EUR/USD Exchange Rate ETN, iPath GBP/USD Exchange Rate ETN and iPath JPY/USD Exchange Rate ETN -- all trade on the New York Stock Exchange (NYSE).

Both of the products offer investors the local yield of the currency they invest in along with changes in the currency's value.

There is more than a semantic difference (ETFs versus ETNs) between the Rydex and Barclays products. As the paper points out, investors are adopting different types of risk when they buy the two products. In the Rydex case, they are purchasing a share of the portfolio. That means they retain any risk that the Rydex ETF fails to track total return of the underlying currency. This risk is currently negligible as the portfolio invests entirely in the underlying currency, says Tim Meyers, ETF business manager at Rydex.

"Any price movement is based on the price movement of the underlying currencies. The return also includes interest from the demand deposit account, which is held at JP Morgan," explained Meyers. The ETFs' total return is net of fees charged by Rydex.

Meanwhile, Barclays is backing the performance of ETNs, that means that the investor is taking on the credit risk associated with Barclays implicit guaranty.

In the case of the Yen products, Barclays also has an edge since it collects interest based on U.S. short term rates from which it collects its fees. The Rydex Yen fund, on the other hand, collects the short term rate in Japan which is now close to zero [it is currently roughly 27 basis points]. That means that the fund sees a drag from its management fee whereas the Barclays ECN does not.

There are also tax differences between ECNs and ETFs: The Rydex ETFs pass along monthly interest income that are taxed as ordinary income while Barclays ETNs are gains are taxed only when they are sold (or when the maturities mature in 30 years).

For Rydex, Barclays launch of the new ETNs comes at a sensitive time. The CurrencyShares are Rydex's quickest growing product, say industry sources. Whether they will continue to maintain their growth in the face of the new competition remains to be seen, but insiders must be watching the developments at Barclays with special interest as Rydex's owner, a trust controlled by the family of deceased founder Skip Viragh, is in active negotiations to sell the firm.

Still, as with any launch in the SEC-entangled ETF world, Barclays product is no surprise. The news will be in how it is received by investors. 

Correction: An earlier version of this story incorrectly stated that the CurrencyShares carry a tracking error risk. As the ETFs are not based on an index, they have no tracking error.

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