ETFs for a Falling Dollar

Exchange-traded funds that invest in foreign currencies, commodities and overseas stocks can help protect your portfolio when greenback falls again.

The dollar has shown some impressive strength in recent days, following a downward slide that began last March. So it might not be a bad time for patient investors to consider adding to their investments outside the dollar. A good way of doing so is through exchange-traded funds. These investments should benefit once the greenback resumes its descent, which is almost surely the buck’s direction over the long haul.

There are several reasons for diversifying currency and country exposure in your portfolio. First, the dollar’s long-term prospects don’t look too bright. We’re running huge budget and trade deficits, the national debt is rapidly mounting, and we don’t save enough money to cover these financial shortfalls. Unemployment is high and economic growth is sluggish, which suggest that interest rates will remain low. That’s not bullish for a currency. If the dollar continues to swoon, inflation will eventually tick up.

Economic growth overseas, especially in emerging markets, is much stronger than at home. Economists project that over the next decade, developing countries such as China, India and Brazil will enjoy growth rates at least two to three times higher than ours. And because the prices of foreign stocks -- as well as foreign currencies and commodities -- don’t move completely in sync with the prices of U.S. stocks, your portfolio will gain a valuable diversification benefit by holding investments denominated in non-dollar currencies.

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You can hedge your dollar exposure by investing in exchange-traded funds and notes. Let’s look at three categories: currencies, commodities and stocks.


Japan and several European countries are in the same pickle as we are: They suffer from slow growth, wide budget gaps and aging populations. For this reason we tend to favor some developing-country currencies over, say, the euro, yen and British pound. WisdomTree Dreyfus Emerging Currency Fund (symbol CEW) provides exposure to eleven currencies, including the Chinese renminbi, Brazilian real and Polish zloty. The currency holdings are equally weighted and rebalanced quarterly. The fund’s annual fee is 0.55%.


We’ll divide this category in two: gold and all other commodities. Gold has a unique monetary characteristic among commodities. In fact, Juan Carlos Artigas, of the World Gold Council, says that global central banks have become net buyers of gold over the past six months -- reversing the norm of many years, during which they were dumping the yellow metal. Gold is hard to value, but it does well in an environment of currency debasement, large budget deficits and rapid growth in money supply. All of these factors abound today.

You can choose an ETF, such as SPDR Gold Shares (GLD), that tracks the price of bullion. The fund levies an annual fee of 0.40%. Or you can buy an ETF that tracks an index of gold stocks, such as Van Eck Market Vectors Gold Miners ETF (GDX), which charges 0.55%. Mining is effectively a leveraged play on gold prices -- something to keep in mind when you’re determining how much to allocate to a fund.

As with gold, hard assets such as oil, copper and wheat are priced in dollars but consumed globally. That means such assets function as a natural hedge against a falling dollar -- and nice protection from inflation. Because emerging markets are the main driver of natural-resource prices these days, you can also view commodities as an indirect play on growth in the developing world.

You can invest in a basket of futures contracts on 19 commodities through iPath Dow Jones-UBS Commodity Index (DJP). This is an exchange-traded note -- essentially a debt instrument whose issuer promises to pay an amount tied to the performance of the underlying index. As such, it adds an extra element of risk: the possibility that the issuer could default on its obligations. The index that this ETN tracks may not have more than one-third of its assets in energy. The ETN also provides exposure to precious and industrial metals and agricultural products, such as grains and livestock. Annual expenses are 0.75%.

Alternatively, you can invest in natural-resource stocks. We prefer a global approach here. Market Vectors RVE Hard Assets ETF (HAP) tracks an index that consists of shares of companies involved in the four major commodity sectors -- energy, precious metals, industrial metals and agricultural products -- along with a smattering of stocks tied to forest products and renewable energy (annual expense ratio: 0.65%).

Commodity sector funds abound these days. For instance, if you like mining, consider iShares S&P Global Materials Sector (MXI), which charges 0.48% a year. Its largest holdings are Australia’s BHP Billiton and London-based Rio Tinto, two of the world’s largest mining companies.

If it’s agriculture you fancy (the increasingly rich diet of people in increasingly prosperous developing countries is a large global investing theme), take a look at Market Vectors Agribusiness ETF (MOO). MOO is very much a global fund. It will grant you access to fertilizer companies in Canada, palm-oil producers in Asia, Japanese farm-equipment makers, and U.S. powerhouses such as seed maker Monsanto and ag giant Archer Daniels Midland. MOO charges 0.58% annually.


Add some emerging-markets stocks and shares of small foreign companies to your anti-dollar portfolio. Small overseas companies tend to have more exposure to domestic economies and currencies, which is what you’re aiming to tap for diversification.

WisdomTree Emerging Markets Equity Income (DEM), which sports a current yield of 5%, is an index on a high-yielding subset of stocks in 18 emerging markets; its expense ratio is 0.63%. A rising income stream in an appreciating currency is a nice asset to hold. SPDR S&P Emerging Markets Small Cap (EWX) allocates nearly 40% to small-company stocks in Taiwan and China; it charges 0.76%.

Finally, if you want broader-brush exposure to small foreign companies, check out Vanguard FTSE All-World ex-US Small-Cap (VSS). The fund currently allocates 21% of its assets in stocks of small companies in emerging markets and, in fine Vanguard fashion, bears a low annual fee of 0.38%.

Contributing Writer, Kiplinger's Personal Finance