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Two Plays on Currencies and Commodities

06/11/2007 12:00 am EST


Keith Fitz-Gerald

Chief Investment Strategist, The Money Map Report

Keith Fitz-Gerald, editor of the Skeptical Investor, recommends one currency ETF and one commodities fund that can help investors diversify their portfolios.

Investing in currencies without a fair knowledge of the money markets of the world and strategy could make you quite nervous. The good currency traders out there know that it is important to have a dual focus on both short-term and long-term speculations.

Our PowerShares DB G10 Currency Harvest Fund (AMEX: DBV) has this strategy down. Its holdings are limited to futures contracts on the major ten currencies, including US, Australian, New Zealand, and Canadian dollars, yen, Swiss francs, British sterling, Swedish krona, Norwegian krone, and euros.

Once a quarter, DBV buys the top three currencies and sells the bottom three as determined by interest yield. DBV hopes to exploit the trend that currencies trading with a forward discount tend to, on average, perform better than those trading at a forward premium.

This strategy works. Since 1994, tests have shown it to produce a 12.5% compounded annual growth rate. DBV was introduced in September 2006 and with all of the potential this company has, its young age just means that it has plenty of room to grow. And grow it will, with us there to see all the profits. (It closed just below $29 Friday-Editor.)

The commodities boom is most definitely still with us. It seemed to lay dormant there for a while, lagging back a bit at the end of 2006. It was a perfect case of an eye in the middle of a storm. Now that the eye has passed and the prices of commodities are once again jumping, I hope you are prepared to profit again.

The PIMCO Commodities Real Return Fund (PCRDX) is a natural resources mutual fund that buys and sells futures and options while holding inflation-indexed securities and other fixed-income instruments in reserve. In essence, this roughly means that the company offers us the chance to profit from pricing pressures on all commodities, with a general focus on energy.

What's more, PCRDX can also invest up to 30% of its assets in foreign-currency-dominated securities. With a declining dollar and the recent fear of instability, this gives us a nice hedge to keep us from biting our nails. Plus, the commodity rise is most definitely not limited to the US, and channeling some money to outside commodities will give this fund the chance to earn us profits we would never have even dreamed of.

If all of this doesn't already sound good enough, management not only keeps expenses down to 1.24% (as compared to the 1.54% associated with other commodity funds), but they also provide a steady dividend yield reaching as high as 17%.

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