3 Strategies to Diversify Away from the Dollar
By Ron DeLegge, Editor
May 27, 2009
SAN DIEGO (ETFguide.com) Ė Itís no secret the US dollar is losing its mojo. And there are several factors at work driving this trend ahead.
China is pushing to have its own currency (the yuan) included in the International Monetary Fundís basket to fund payments for bilateral trades. Economist Nouriel Roubini of New York Universityís Stern Business School warns the Chinese yuan is in the midst of overtaking the US dollar as the worldís reserve currency.
Oddly, the ones leading the demise of the dollar are the enemies from within. The U.S. government under the direction of both the Bush/Obama administrations, Timothy Geithner and Ben Bernanke have increased spending and deficits. They are also defacing the dollarís value by increasing the money supply via the printing press in the basement trick.
How can you defend yourself against a falling US dollar?
Currency ETFs allow you to capitalize on the strength of foreign currencies relative to the U.S. dollar. Whenever a U.S. investor buys a currency ETF, they are automatically short the dollar in the corresponding currency. This type of strategy allows you to hedge against weakness in the dollar.
Rydex Investments offers 9 currency ETFs. The CurrencyShares Euro Trust (NYSEArca: FXE) was launched in 2004 and is the oldest among these. FXE has just over $589 million in assets and has a 0.30% year-to-date gain. Top performing currency ETFs so far this year include the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) ahead by 11.74%, the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) up by 8.67% and the CurrencyShares Mexican Peso Trust (NYSEArca: FXM) up by 6.71%.
The Rydex currency linked funds, like most currency ETFs, use a grantor trust product structure. This makes their taxation quite different from traditional stock and bond ETFs. Even if you own a currency ETF for a long-term holding period (longer than one year) youíre taxed at ordinary income rates. (In the June issue of the ETF Profit Strategy Newsletter, we told our subscribers about which ETF product structures are the most tax efficient and how to minimize the tax hit of certain ETF structures. Check it out.)
Own Hard Assets
Another way to protect yourself from a declining dollar is to own assets not generally correlated to the dollar. In this regard, investing in metals like gold and silver have enjoyed a new found resurgence in popularity. Investing in gold or silver can be done by purchasing coins, bars or jewelry. The disadvantage of owning physical metal is you need to store and insure it. The advantage is you own a tangible asset that you can feel and touch.
Gold ETFs and silver ETFs are another easy way to invest in metals. The SPDR Gold Shares (NYSEArca: GLD) has over $31 billion in assets and is the largest gold ETF in the world. Its share price reflects one tenth the ounce price of gold bullion, which currently trades around $950 per ounce. The iShares Silver Trust (NYSEArca: SLV) offers market exposure to silver bullion. SLV has risen 28.75% year-to-date compared to GLDís 8.37% gain.
Donít overlook the tax implications of your investment decisions. The taxation of gold and silver investments is currently treated as a collectible which is a maximum capital gains rate of 28%. These tax rates also apply to gains in both gold and silver ETFs that are backed by the physical asset.
By diversifying your investment portfolio into foreign ETFs you gain other benefits beyond equity and bond diversification. Virtually all international and emerging markets stock and bond ETFs offer unhedged currency exposure. Many investors overlook these benefits or arenít aware of them.
Broadly diversified index funds like the Vanguard FTSE All-World ex-US ETF (NYSEArca: VEU), iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) and the SPDR MSCI ACWI ex-US ETF (NYSEArca: CWI) offer both equity and currency diversification. Some actively managed mutual funds offer unhedged currency exposure whereas others do not. Ask your financial advisor or call your fund company to find out.
Defend Your Money
Now more than ever, itís vital to protect your assets. Over the past year or so weíve witnessed the unprecedented destruction of trillions of dollars in innocent capital. If you believe the demolition party is over, youíre misguided. More destruction awaits the market. Donít become a victim. Take the necessary steps to prepare your money and your investments for these and other mega-trends. Are you ready?