3 Ways to Play the Dollar with ETFs

09/14/2011 11:30 am EST

Focus: ETFS

Rudy Martin

Editor, Investing Insight

Whether the dollar weakens or strengthens, there are a few good ways to profit, writes Rudy Martin of Latin Stock Investing.

Despite opinions to the contrary, the US dollar—or real or peso—is not as good as gold.

An ounce of the yellow metal could be had for $800 in late 2009, but it now requires more than $1,800 to buy a similar quantity. The same goes for the Brazilian real, which was worth 40 cents of US currency in late ’08 and is now worth more than 62 cents. As for pesos of the Mexican variety, that currency’s value has appreciated from 6.7 cents per peso in early 2009 to a recent level of 8 cents.

What about the other Latin American currencies?

Year to date, Colombia’s peso has appreciated just shy of 8% relative to the Yankee dollar, easily outdistancing the impressive 4.9% gain in Brazil’s real for the same period.

Resource-rich Peru has suffered from weak ores and minerals prices along with its election of a president with a history of leftist sympathies; yet its currency—the ”new sol”—has gained 3% versus the greenback year to date.

Chile’s peso is up 1.4% relative to the buck for the period. And little Uruguay, usually considered not much more than an economic backwater, sports a peso that is now worth 4.5% more in US dollar terms than it was at the end of last year. The nation has discovered capitalism!

The “2011 Business Climate Index” compiled by The Getulio Vargas Foundation of Brazil and the Economic Research Institute of Germany positioned Uruguay with 7.5 points and Colombia with 7.4 points as the most-pro business countries in the Latin American region.

Recent events do not bode well for the US dollar. S&P’s downgrade of Treasury debt and the Fed’s announcement that short-term rates will remain near zero into 2013 will not attract “hot” money seeking appreciation to US shores. The same goes for recent US economic weakness and extreme
political divisiveness.

While pundits say that the intentions of the keepers of the US economy are implementing a “cheap currency policy” to re-inflate the economy, some key Latin American countries are tempering government spending and maintaining reasonable interest rates to keep their expansive economies from overheating. Their firm currencies are helping to keep lids on import prices and tame inflation.

Given that scenario, guess where the capital is likely to flow! Weakened by Europe’s financial imbroglio and the inability of the United States to get its economic engine started, Latin American stock markets have generally stalled thus far in 2011 despite internal consumption by their expanding middle classes.

But as market gauges in the region resume their upward trajectories, returns for US investors in Latin American securities can be turbocharged by strengthening currencies.

For example, a Latin American market that gains 10% in local terms will produce a greater US dollar return because of the currency appreciation relative to the greenback. (But keep in mind, this works both ways, should a currency decline versus the US dollar.)

Those who wish to participate directly by speculating or hedging directly in major Latin American currencies can buy exchange traded funds linked to the Brazilian real and the Mexican peso.

The WisdomTree Dreyfus ETF BZ Real Fund (BZF) is designed to achieve total returns reflective of both money-market rates in Brazil available to foreign investors and changes in value of the Brazilian real relative to the US dollar.

With an annual expense ratio of 0.45%, the fund has returned 10.5% year to date and 23.3% for the 12 months through the end of July.

CurrencyShares Mexican Peso Trust (FXM) is structured to reflect the price in US dollars of the Mexican peso. This ETF levies an annualized 0.40% expense ratio, and produced a total investment return of 9.5% for the 12 months ended August 31.

If you disagree with my view here, and think that US dollar will recover and reassert itself as a true world reserve currency, then the PowerShares DB US Dollar Index Bullish ETF (UUP) may be the fund for you to invest in. It is designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

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