The Inner Workings of Currency Linked Trusts
Rydex Investments manages a series of seven trusts called "CurrencyShares" that aim to track the movement of single country currencies. The oldest of these is the Euro Currency Trust (NYSE: FXE) which was launched in 2005.

The CurrencyShares are designed to imitate the price of the underlying currency based on the Federal Reserve Noon Buying Rate, which is the exchange rate of the U.S. dollar into the applicable foreign currency.

Unlike traditional ETFs, which are registered under the Investment Company Act of 1940, the CurrencyShares are grantor trusts governed under the Securities Act of 1933. They're created and redeemed in each respective foreign currency and they don't use any leverage or derivatives. The actual currency is deposited within each trust and held at a secure depository managed by the London branch of JP Morgan Chase Bank, N.A.

While the architecture of the CurrencyShares is considerably different from traditional ETFs, they still trade in a similar fashion and can be purchased with brokerage orders or shorted. Using currency linked trusts eliminates the hassle of having to establish a currency trading or futures account.

Currency linked trusts also provide interest in the form of a yield based upon overnight interest rates in the country of the underlying currency. Whether investors earn income will primarily depend on the relative value of the currency held by the Trust and the U.S. Dollar.

Tax Treatment on Currency Trusts
With regard to taxes, income is flowed through to each shareholder as if they owned a pro rata share of the currency assets held by a particular trust. Shareholders are required to recognize gains or losses when the Trust converts the foreign currency it holds to U.S. Dollars to pay the Sponsor's fee or to make distributions to the Trust's shareholders. Consult your tax advisor for further tax information. ther index versions of the FTSE RAFI methodology follow specific industry sectors, midcap stocks and international equities.

Currency Linked ETNs
Exchange-traded notes (ETNs) linked to specific currencies is another way to add currency exposure to your investment portfolio. ETNs are debt securities and typically have a maturity date. Unlike currency linked trusts, ETNs carry issuer risk which is tied to the credit worthiness of the financial institution backing the ETN.