Question:
Dr Gene, you and others (like Warren Buffet) have convinced me that the Chinese are artificially keeping their currency low versus the dollar. Eventually a correction will most likely happen with the yuan strengthening. Is this a fair understanding of what you believe? If so, is the WisdomTree Dreyfus Chinese Yuan fund (CYB) a good investment betting on this yuan/dollar correction?
Answer:
The WisdomTree Dreyfus Chinese Yuan is an exchange-traded fund that seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese yuan relative to the U.S. dollar. The fund normally invests in a combination of U.S. money market securities with forward currency contracts and currency swaps which are designed to create a position economically similar to a money market security denominated in Chinese yuan.
WisdomTree Dreyfus Chinese Yuan fund does capture some of the appreciation in the Chinese yuan. However, the correlation is not 100%. In fact over the past couple of years, it has been approximately 45%, meaning that for a 1% appreciation in the yuan relative to the U.S. dollar, the fund will likely appreciate by 0.45%. It would take a pretty significant appreciation of the yuan to achieve great returns with CYB. In looking for alternatives, we came up with no other fund tracking the performance of the yuan. We do not believe you will find it very rewarding to bet against a managed currency. For instance, while there has been plenty of reason for the Chinese central bank to float the yuan in the past few years, it has seldom moved from its dollar peg. Only in the past year has it begun to see change, and that has been a whopping 5%. Translate that into the CYB and you would have achieved about 2.5%. Meanwhile, the S&P 500 is up over 30% with dividend reinvestment. We do not recommend the strategy, but if you believe China’s currency is set to soar, CYB is the only fund available.
Question:
Our twins’ grandmother is systematically gifting away a bulk of her estate. She wants to give each of our girls $5,000. She’s already funding their education accounts, so she wants us to establish custodial accounts for the girls. What are your thoughts?
Answer:
Custodial accounts are established under your state’s Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. We do not recommend opening a custodial account for a child. Once funds are transferred to a minor’s custodial account at a financial institution or brokerage firm, funds irrevocably belong to the child. While an adult—either the parent or grandparent—can serve as the custodian or manager of the account while the child is a minor, the child will gain control of the account at a young age, usually 18 or 21. Sweet innocent five-year-old twins can turn into obnoxious teenagers or irresponsible young adults.
Additionally, custodial accounts can reduce college financial aid awards because student assets are weighed more heavily than assets belonging to the parents.
Income from your child’s custodial account belongs to the child, and if that income exceeds $950, a federal income tax return must be filed. If a minor child’s investment income exceeds $1,900 it will be taxed at the parent’s higher rates per the kiddie tax rules. In some cases, a child’s interest income could be as high as 35% and long-term gains and dividends could be taxed at 15%.
Kiddie tax prevents high-income tax bracket parents from shifting investment income to a lower-tax bracket child. However, if all of your child’s income consists of interest, dividends and mutual fund capital gains distributions, you may want to talk to your tax adviser to see if you may qualify to include that income on your form 1040 and pay the resulting extra tax with your return. We would recommend putting the money in a 529 Plan, or setting up a trust for the children.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
