ETF Ideas for a Falling US Dollar

08/05/2011 8:00 am EST

Focus: FOREX

Traders and investors can stay protected and even profit in a weak-dollar environment by choosing among these ETFs, which track precious metals, overseas markets, and select world currencies.

Despite its impressive status as the world’s reserve currency, it’s no secret the US dollar has been on a long, steady, secular decline. And the forces driving this trend are mostly internal. Loose monetary policies coupled with a spendthrift government are direct contributors to the dollar’s waning buying power.

How can you defend yourself against a falling US dollar?

One way to protect against a declining dollar is to own assets not correlated, or inversely correlated, to the dollar. In this regard, investing in metals like gold and silver has enjoyed a newfound 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.

Precious metals ETFs are another easy way to invest in metals. Physically backed trusts, like the SPDR Gold Trust (GLD) has over $60 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 $1,590 per ounce.

The iShares Silver Trust (SLV) offers market exposure to silver bullion. SLV has risen 26.87% year-to-date compared to GLD’s 13.70% gain.

If you’re not sure which specific metal to own, the ETFS Physical Precious Metal Basket Shares (GLTR) offers four-in-one exposure to gold, silver, platinum, and palladium. (See also ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL).)

The taxation of precious metals 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.

NEXT: Adding International Exposure


Adding International Exposure

Here’s another easy way to diversify away from the US dollar: Buy and hold foreign ETFs.

Because virtually all international and emerging market stock and bond ETFs offer un-hedged currency exposure, you get more than just equity and bond diversification.

Broadly diversified international ETFs like the Vanguard FTSE All-World ex-US ETF (VEU), iShares MSCI Emerging Markets Index Fund (EEM), and the SPDR MSCI ACWI ex-US ETF (CWI) offer both equity and currency diversification.

Alternative Currencies

Currency ETFs allow you to capitalize on the strength of foreign currencies relative to the US dollar. Whenever a US investor buys a foreign currency ETF like the CurrencyShares British Pound Sterling Trust (FXB) or CurrencyShares Japanese Yen Trust (FXY), they are automatically short the dollar in the corresponding currency. This type of strategy allows you to hedge against weakness in the dollar.

As the intrinsic value of paper currency becomes more doubtful, not all paper currencies will necessarily perform poorly. While overweighting precious metals inside your portfolio like everyone else is most certainly a popular trade, “caveat emptor,” or buyer beware, whenever large crowds agree with each other.

For that reason, we highlighted in our latest weekly ETF pick one particular currency ETF we think is a good paper alternative in a world of diminishing choices. It’s ahead by more than 7% since we first featured it, and more gains are likely ahead.

Good Market Timing

Now more than ever, it’s vital to protect your assets. Over the past few years, we’ve witnessed the unprecedented destruction of trillions of dollars in capital. And unfortunately, the demolition party isn’t yet over.

While most financial professionals will tell you about the importance of securities diversification, only the very best will warn you about the growing importance of currency diversification. When is the best time to do this? Before the storm, not during it.

By Ron DeLegge of

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