ETFs That Fight Inflation and Dollar Devaluation Earn 'Street' Credibility

by: Gary Gordon

For Atlas Shrugged fans, “Who is John Galt?” is the catch-phrase that unites proud producers around the country. Similarly, sophisticated television viewers have been dying to determine “Who killed Rosie Larsen?” in the AMC production of The Killing.

There’s a bit more pomposity in the investment arena, however. Rather than admit to one’s inability to predict or explain stock market direction, analysts are often caught falling back on the ever-popular phrase, ”Don’t fight the Fed.”

Simplistically speaking, if the market happens to be climbing during an easy money Fed period, one is supposed to gravitate toward stock assets. Conversely, if the Fed is tightening and the market happens to be struggling, one is supposed to lighten up on stocks.

More recently, though, critics of the Fed are warning that stocks may “decouple” from the Fed’s manipulation. The contention is that the quantitative easing programs (QE1, QE2) as well as the 2-plus years of 0% interest rates have decimated the dollar and ignited inflation.

Chairman Bernanke disputes the naysayers, of course. He maintains that wage inflation is non-existent, while simultaneously discounting skyrocketing commodities (e.g., food, energy, etc.) as transitory. (Note: The cost of living has risen for nine consecutive months, but who’s counting?!)

Rather than getting into the fray (at least at this moment), I wanted to consider a different interpretation for ”Don’t fight the Fed.” Specifically, if the Fed’s actions have trashed the dollar and dangerously inflated food and energy costs, could you have followed the Fed’s lead without stocks? Could you have exclusively used currencies, commodities and bonds to hedge against dollar devaluation as well as commodity price inflation?

Here is the performance for 10 of the most popular non-stock hedges in the ETF universe since March 9, 2009:

Approx %
Currency and Bond ETFs
PowerShares Dollar Bearish (NYSEARCA:UDN) 19.7%
SPDR International Inflation Protected (NYSEARCA:WIP) 50.4%
CurrencyShares Australian Dollar (NYSEARCA:FXA) 80.9%
Currency Shares Canadian Dollar (NYSEARCA:FXC) 35.7%
iShares TIPS (NYSEARCA:TIP) 22.0%
Aggregate 41.7%
Commodity ETFs
PowerShares DB Base Metals (NYSEARCA:DBB) 103.5%
iPath DJ Total Commodity Index (NYSEARCA:DJP) 66.1%
SPDR Gold Trust (NYSEARCA:GLD) 65.6%
iShares Silver Trust (NYSEARCA:SLV) 247.0%
United States Oil (NYSEARCA:USO) 58.5%
Aggregate 108.1%
SPDR S&P 500 Trust (NYSEARCA:SPY) 106.0%

Risk-adjusted, currencies and bonds performed at a level that is comparable to U.S. stocks in the S&P 500. Moreover, in some assessments, the beta of the all-commodity ETF portfolio may have been no riskier than SPY.

That said, during the 2009-2011 period, the most beneficial interpretation for ”not fighting the Fed” is multi-faceted. Stock prices had to rise because non-existent interest rates made savings accounts and treasury yields entirely unacceptable. Foreign currencies had to climb because the $USD could be borrowed for nothing, then invested for a higher yield in a currency backed by a more fiscally responsible entity abroad. Commodities had to soar because they are priced in U.S. dollars and the Fed’s actions directly and indirectly weakened the world’s reserve currency ($USD).

Where do we go from here? I wouldn’t be gambling on a slow-to-change-course Fed through an over-reliance on U.S. stocks, commodities or a near-term dollar crisis. In fact, the best way to play “don’t fight the Fed” right now is to look to central banks overseas; that is, as soon as foreign central banks begin to downshift from tightening to neutral, those foreign stock markets should be the premier investments to add to your portfolio.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.