Foreign currencies have been all the rage in the ETF business for the last couple of years. The major currencies are all well-represented and in some cases can be traded in leveraged and inverse versions as well. Product developers, looking for new ways to attract assets, are now going further out the risk curve to emerging market currencies. The latest: WisdomTree Dreyfus Emerging Currency Fund (CEW), which began trading today.

WisdomTree already offers four ETFs that track individual emerging market currencies including the Indian Rupee (ICN), Chinese Yuan (CYB), Brazilian Real (BZF), and the South African Rand (SZR). CEW tracks those four currencies plus several others: Mexican Peso, Chilean Peso, Polish Zloty, Israeli Shekel, Turkish New Lira, South Korean Won and the Taiwanese Dollar. The fund attempts to have equal exposure to all the currencies it holds, rebalancing quarterly. Technically, CEW is “actively managed” since it does not follow an index. The manager has discretion to change the currencies included in the fund.

According to a fact sheet from WisdomTree, CEW will not actually own the currencies it tracks. The portfolio is invested in U.S. dollar money-market type instruments combined with foreign currency forward contracts. The result is supposed to be similar to holding money market instruments denominated in those currencies. This approach is definitely more liquid, but it remains to be seen how well it will achieve the objective.

WisdomTree has an interesting study, The Case For Emerging Currencies, that suggests investors may receive both a diversification benefit and yield enhancement through an allocation to this asset class. There is still substantial risk. CEW reduces the risk somewhat by holding a variety of currencies, and is not nearly as speculative as the single-currency ETFs. On the other hand, we have learned in recent months how interconnected the global economy is, so I’m not convinced the diversification will help as much in the future as the backward-looking studies indicate.

For those interested in emerging currency exposure in a convenient package, CEW may prove to be a useful tool. Like all foreign currency investments, it should be approached with caution. WisdomTree has more info about CEW on their web site.