3 Strategies for Protecting Against a Depressed Dollar
Ron DeLegge, Editor
October 6, 2009
SAN DIEGO (ETFguide.com) – If you’ve been flirting with the idea of finally taking that coveted European vacation, you might want to wait. The depressed state of the U.S. dollar has turned the cost of your foreign excursion from a small fortune into a major one.
Wasn’t it just last week at the G20 summit that U.S. Treasury Secretary Timothy Geithner said a strong dollar is in America’s interest? Meanwhile, the dollar continues to sag further and further into the mire. Is oblivion the next stop?
Let’s evaluate three strategies for dollar hedging.
In addition to providing securities diversification, almost all index funds and index ETFs provide currency diversification too. Unlike actively managed funds, which sometimes hedge with currencies, index funds provide unhedged currency exposure. Simply put, the underlying foreign securities inside index funds are traded and priced in their native or local currency.
In a recent radio interview on the Index Investing Show, the value of foreign TIPS (NYSEArca: WIP) were discussed. “Two-thirds of inflation protected bonds in the world come from outside of the United States,” said Tom Anderson, Head of Strategy and Research group at State Street Global Advisors. Anderson also emphasized that foreign TIPS are a good strategy for U.S. investors that want inflation protection minus dollar exposure.
Metals in the Mix
The falling dollar has attracted a lot of excitement among commodity investors, particularly goldbugs. Because commodities are priced in dollars, their value rises when the dollar declines. This, in part, probably explains the resurgence in gold prices (NYSEArca: GLD), which now hover around $1,000 per ounce. Since the beginning of the year, GLD has gained 15.4%.
What’s bad for the dollar is good for gold, but other structural changes may be at work.
The Independent, a British newspaper, reported secret meetings between Arab states, China, Russia, Japan and France to end the practice of oil being priced in U.S. dollars. Sources of the unconfirmed meeting also said a basket of currencies including the euro, the yen and the Chinese yuan were being considered as alternatives.
To learn more about the future prospect of gold, read "$1,000/oz Gold - New Reality or New Bubble?"
According to ETFguide.com’s online database, there are 27 currency focused ETFs and ETNs. Certain funds, like the PowerShares DB US Dollar Bearish Fund (NYSEArca: UDN) are designed to increase in value when the dollar declines. If you’re not comfortable with shorting the dollar, other choices exist.
Rydex SGI offers 9 currency ETFs. The oldest and largest of these is the CurrencyShares Euro Trust (NYSEArca: FXE). FXE is linked to the performance of the euro and has climbed 5.04% year-to-date. In addition, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) has jumped over 25% and the Canadian Dollar Trust (NYSEArca: FXC) is ahead by 13.20%. By owning any one of these currency ETFs makes you automatically short the U.S. dollar versus that respective currency.
It’s no secret the U.S. dollar has been taking a beating so far this year. No one knows how much longer this will persist, but you should prepare yourself to combat its wealth eroding impact.
Well designed investment portfolios should have more than just stock and bond diversification. Investors should also have adequate currency diversification. And obtaining this is easily accomplished by owning foreign ETFs, currency ETFs or metal ETFs. The financial tools exist, now it’s up to you to successfully utilize them.