Profiting from the Falling US Dollar

02/09/2008 12:00 am EST

Focus: ETFs

Timothy Middleton, editor of ETF Insider and columnist for MSN Money, told investors how they could use ETFs to make money as the dollar falls.

Tim Middleton told attendees that they there were three ways that they could use exchange traded funds (ETFs) to benefit from the falling US dollar:

  • Direct currency plays
  • Indirect currency plays in commodities that are priced in US dollars
  • Combining currencies with equity investments-his favorite

He said that as of the end of January, the US dollar was down 35% against the Euro over the past eight years and is now approaching its historical low. (It put in new lows recently-Editor.) But he said he doesn't expect it to go down much longer and should begin its path back up in the next few months.

In the meantime, investors can employ these strategies to benefit from the low levels.

ETFs that represent investments in foreign currencies include investments in the CurrencyShares British Pounds Sterling Trust (NYSEArca: FXB), the CurrencyShares Euro Trust (NYSEArca: FXE), which rose14.5% last year, and the CurrencyShares Japanese Yen (NYSEArca: FXY) trust which was introduced last fall and grew 7.4% in the last three months. There are a total of eight currency trusts available, which represent shares in a foreign bank account that earn capital gains as well as a good rate of interest, currently yielding between 3% to 5% and paid monthly.
A more immediate way to bet on this issue is to buy the PowerShares US Dollar Index Bearish (Amex: UDN), which was up 2% in the last three months. A mirror image bullish fund is the PowerShares US Dollar Index Bullish (Amex: UUN).

Investors may also invest in commodities, priced in dollars. For example, energy continues strong, and the Energy Select SPDR (Amex: XLE) is the way to play that sector. XLE rose 37% last year, and he said it is still a good sector to own.

Another obvious candidate is gold, and ETF investors can invest directly in gold bullion, through streetTRACKS Gold Shares (NYSEArca: GLD), which rose 31% last year. The ETF owns 20 million ounces of gold; only six central banks and the International Monetary Fund have a bigger reserve.

But Middleton prefers to look at currencies through the lens of equities, where you can take advantage of stronger currencies and receive dividends through the earnings of their holdings. He recommends the iShares MSCI EAFE Index (NYSEArca: EFA), which rose 10% last year and is the largest ETF of its kind. But it has a new rival, the Vanguard Euro Pacific (Amex: VEA) which carries a lower expense ratio. Because of the lower cost, if you are a long-term investor, Middleton recommends the VEA and for short-term traders, the EFA, due to its liquidity and very tight spreads.

Middleton also likes some of the emerging markets ETFs, to take advantage of that growth. He recommends the iShares MSCI Emerging Markets Index (NYSEArca: EEM), but mentioned that Vanguard also has a new fund with a much lower expense ratio, Vanguard Emerging Markets Stock ETF (Amex: VWO).

Another way to play foreign equities without choosing between developed and emerging markets is the Vanguard FTSE All World Ex-US fund (VFWSX). Combined with the Vanguard Total Stock Market ETF (Amex: VTI), investors can capture substantially all the equities in the world. (Editor's Note: Vanguard also offers an ETF version of VFSWX, with the ticker symbol VEU.)

One more alternative-investors may also play individual countries and regions via ETFs. In this arena, Middleton prefers the Claymore BNY/BRIC (Amex: EEB), which has the largest concentration of its holdings in the vigorous Brazil market, particularly in energy, telecom, and financials.

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