The Five Best ETFs for a Falling Dollar

After making impressive gains late last year, the US Dollar has been falling in recent months. The long term outlook for the US currency remains weak, as the twin fiscal and current account deficits show no sign of abating and monetary policy not likely to tightenanytime soon. The following five ETFs are minimal-risk investments that can help maintain your purchasing power as the value of the dollar falls:

5. Wisdom Tree Dreyfus Euro (EU). This currency ETF is a great place to keep your cash safe from a dollar's decline. The fund invests your money in Euro denominated CDs and short term bonds, not only keeping your cash outside the dollar but also paying you interest while you wait.

4. SPDR Gold Trust (GLD). The infamous GLD that supposedly now holds more gold than Font Knox, is still a great way to play the declining dollar. But gold's dual status as both a commodity and a currency make it more volatile than its paper-based peers.

3. Powershares US Dollar Bearish Fund (UDN). This fund invests in a basket of developed market currencies, with over 50% placed in the Euro and the remainder split between the Yen Pound, Canadian Dollar, Swedish Krona, and the Swiss Franc. It offers the safest, broadest bet against the dollar.

2. WisdomTree Dreyfus Emerging Currency Fund (CEW). WisdomTree's latest currency ETF invests in short-term instruments denominated in a diverse basket of emerging market securities, including those of China, India, Mexico, Brazil, South Africa, and Poland. Emerging market currencies will ultimately be the big winners from the dollar's decline, but are more volatile than those of the developed world.

1. SPDR DB International Government Inflation-Protected Bond (WIP). This exciting fund invests in inflation-linked government bonds from major issuers around the world. Most of its holdings are in the Euro area and with non-Euro European issuers like the UK and Sweden. But the fund also buys a decent mix of emerging market bonds as well. WIP's extra yield and wide geographic distribution is good protection against the scenario of competitive devaluations.

ETFs to Avoid: FXF. The Swiss Central Bank has made it clear that it is not willing to see the Franc rise any further.

Disclosures: No positions.

Comments

[Ashevillain:]

The Merk hard Currency Fund is a good, actively managed mutual fund that is designed to protect against a falling dollar.

May 22 08:40 AM

[jayapal:]

i truly believe recommending etf's with daily trading volume of such small amounts (EU under 1k a day) does a disservice to readers. the idea that one could say that EU is "a great place to keep cash safe" is only relevant if you're emptying your piggy bank to buy a few shares. any larger buys would distort this thin market.

May 22 10:24 AM

[Ron Rowland:]

jayapal is being kind. The volume in EU is zero many days, yesterday for example. There are better vehicles to play the euro, FXE for one.

May 22 11:15 AM

[ETF Grind:]

That's my mistake. clearly meant to recommend the FXE.


On May 22 11:15 AM Ron Rowland wrote:

> jayapal is being kind. The volume in EU is zero many days, yesterday
> for example. There are better vehicles to play the euro, FXE for
> one.

May 22 11:44 AM

[Analyste de...:]

I've been using currency ETFs for years, and while they have outperformed CASH, there's significant volatility to consider. Deleveraging (witnessed in 2008) proves currency bets very risky relative to potential gains. Once burned, twice shy!

Don't think of these as 'alternatives to equities' in your portfolio, long term! If used prudently, the gains will be marginal, so its better to see currency ETFs as fixed income substitutes and allocate accordingly (<10% to forex, for a rally or 80/20 portfolio.)

Also, UDN plus any Euro fund is redundant.

May 22 12:24 PM

[PeoplesAnalyst:]

Some other ideas include:

FXA - Aussie Dollar ETF (a commodity based economy)
SLV - Silver ETF
TIP - US TIPs ETF

May 22 12:43 PM

[optionsgirl:]

You are right, but the management fees are very high compared to the etf's. Also, because it is a mutual fund, you settle at the end of the day, so it is less flexible than the etf's which move like stocks.
Merk's commentary is free, and is usually a good read!


On May 22 08:40 AM Ashevillain wrote:

> The Merk hard Currency Fund is a good, actively managed mutual fund
> that is designed to protect against a falling dollar.

May 22 01:09 PM

[Mad Hedge F...:]

How about gold. ) I can’t think of a better reason to keep a core long term position in gold than the prospect of the US losing its triple “A” rating. The chatter about this yesterday took the barbaric relic up to a two month high of $958, a mere $50 from an all time high. Quite honestly, I never understood why the American rating has stayed this high for this long. If any other entity had increased their debt from $5 trillion to $11 trillion over the last eight years, then boosted it to $13 trillion over the last three months, their rating would have been slashed ages ago. Like to the level of Zimbabwe. Is it any surprise that gold demand soared by 38% in Q1, according to the World Gold Council? And now the Russian Central Bank is allowing other banks there to pledge gold as collateral. Keep your gold position so you don’t miss the inevitable gaps up, as well as miners, like Barrick Gold (ABX).

May 22 01:50 PM

[RiskReturnO...:]

DBA is best investment in the falling dollar environment. You also get benefit from emerging markets consumer growth. Seasonal factors are also strong, at least until July. Technical breakout above $27 and 200 day MA makes DBA very BULLISH.

TBT is another alternative, as least until 10 year treauries hit 3.5% (looks like pretty soon at the pace we are going).

May 22 03:10 PM

[pftittl:]

I'm long TBT, and concur.

May 23 10:14 AM