The U.S. government has committed $7.8 trillion and spent almost $1.4 trillion according to a recent New York Times article, which used information from the treasury department and the Federal Reserve to break down U.S. commitments pledged to save us from the financial crisis. Will this lead to the ultimate demise of the dollar? If so, how would you set yourself up to profit from it?
Hyperinflation is a condition in which prices increase rapidly as a currency loses its value. While you could open up a currency account and simply short the dollar, I am going to focus on a few funds that are readily available to the average investor that doesn’t trade currencies. Purchasing real assets or commodities is one way to profit from rising prices so let’s take a look at some diversified investment offerings in the commodity arena (click to enlarge):
From a recent performance standpoint, the clear winner is the Greenhaven Continuous Commodity Index Fund, which has the lowest weighting to energy related commodities. I had a chance to talk with the founder of Greenhaven at the Inside Commodities Conference held at the NYSE in early November (see pictures from the event).
This fund is the only commodity fund that rebalances daily in an effort to maintain maximum diversification, which explains the slightly higher management fee. Relative to the other choices above, this is a good fund if you are not into high levels of volatility.
The iPath GSCI Total Return Index rang in with the highest allocation to energy related commodities and not surprisingly it had one of the worst percentage losses as a result of the drop we’ve seen in those commodities. The weighting of the underlying index is based on the average historical world production weights of the individual commodities, which explains the high weighting put towards energy related commodities.
The PIMCO Commodity Real Return Strategy fund racked up the worst loss, but charged the highest fee. With a one-star rating given by Morningstar you might be thinking “what sucker is going to buy this?” Looks can be deceiving; the fund provides exposure to the Dow Jones AIG Commodity Index, while placing small bets with individual commodities. For instance the fund may pair natural gas against oil to profit from the delta in price appreciation, but in addition to actively placing small bets on individual commodities, the manager also purchases treasury inflation protected securities (TIPS for short) rather than treasuries with the excess capital. This allows the fund to gain on not only commodity price increases, but inflation expectations as well. Unfortunately in this deflationary environment this investment strategy has resulted in a double whammy for PIMCO manager Mihir Worah.
When evaluating investments such as ETNs be sure to check and see that the issuer of the notes is credit worthy. While this may be easier said than done, it is worth at least making an attempt. Unlike ETFs, which hold the underlying securities, ETNs are debt instruments guaranteed by the issuer. If the issuer goes bankrupt, you could lose everything. Liquidity is also an important factor; some funds may have bid ask spreads as high as fifty cents per share so be sure to always use limit orders and try and split the spread.
*Six month performance measured from June 2, 2008-November 2, 2008
Source: Tracking the Bailout: The Government’s Commitments, NYT, November 26, 2008
Disclosure: no positions