Investors looking for a bastion of stability, and potentially some upside, could do worse than a Chinese currency ETF or ETN.

Prior to 2005, the Chinese yuan (also known as the renminbi) was directly pegged to the U.S. dollar. The Chinese government relaxed that peg in 2005, and has allowed the currency to slowly appreciate against the dollar ever since. But the government still keeps a tight rein on things, never allowing the currency to deviate that much from the dollar peg.

There are a lot of people who think it should. It’s become de rigueur for politicians to call for China to allow its currency to appreciate against the dollar. The feeling is that China is deliberately setting the peg below market rates as a way to make its exports more attractive.

If you believe that—and if you believe China will continue to relax the peg—investing in the yuan could make sense.

Accessing The Market

Investors looking for access can choose between two exchange-traded products: the Market Vectors – Chinese Renminbi/USD ETN (NYSE Arca: CNY) and the WisdomTree Dreyfus Chinese Yuan Fund (NYSE Arca: CYB).

Both target similar returns. CNY tracks an index of nondeliverable yuan forward contracts, which tend to correlate highly (but not perfectly) with spot currency movements. CYB also uses forward currency contracts to access ultrashort-term Chinese bonds. Think of both almost as Chinese money market funds.

CYB is actively managed by WisdomTree’s partner, Mellon Capital, a big currency player.

Its managers have flexibility to try to find the best forward contracts with maturities ranging from one to three months.

Dealing in such short maturities raises the question of how active Mellon’s managers can be, but the market for yuan-based forward contracts measures some $3 billion per day, so there’s clearly some wiggle room.

ETF Vs. ETN

A much bigger difference than active versus passive comes with the structure of the funds: CNY is an exchange-traded note, while CYB is an exchange-traded fund.

As an ETN, CNY is actually a debt instrument. That means investors are exposed to the credit risk of the underlying bank. In this case, CNY is issued by Morgan Stanley. Morgan Stanley is generally considered one of the stronger U.S. banks, but at the moment, the entire Financials sector remains in question.

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