International Currency ETFs vs Mutual Funds

[ESRBob]

Was looking at PFUIX today, thinking I'd see a nice spike in this unhedged international bond fund... Nothing to speak of. Then I looked in their holdings and saw a ton of Eurodollar and US Agency stuff. I guess I thought it was an international bond fund... silly me. Anybody know the story on this one?

That got me looking at other ways to get real international currency exposure -- CDs at Everbank and a new crop of currency ETFs -- FXE, FXY, FXA, VXC and VXB for the Euro, yen, aussie, canadian and pound.

So far, straightforward.

Then I started seeing that these ETFs do/don't/can't quite tell take any interest earned on their holdings and add it to the value of the ETF, meaning you would not pay taxes on this until you sell the fund. Now that got my attention: a way to hold fixed income investments without paying annual taxes at high rates on non-qualified dividends and interest.

Is this possible? Does anyone hold these funds or know how the distributions are handled from a US taxpayers p.o.v?

If it works for international bonds, then why stop there: could someon create a US bond ETF that did the same thing? Hold bonds where the interest gets added to the NAV and hold it a really long time. I'd be a buyer! Anybody know whether ETFs are able to get away with this?

 

[Olav23]

DJP, the commodity ETF is something similar to what you speak of. It tracks the Commodity index instead of actually holding the futures, and is called an "exchange traded note". This gives it better tracking ability as well as better tax treatment from holding something like PCRIX.

Of course, you are also taking on credit risk of the issuer, which may or may not be priced in.