Swiss Franc Trust ETF: Protecting Your Portfolio From Volatility

Sep.28.11 | About: CurrencyShares Swiss (FXF)

Since Standard & Poor’s downgraded the US government’s credit rating in July, the S&P 500 has experienced more down days than up days, providing additional fuel for bearish pundits who prognosticate that the US is on the cusp of a second depression.

Although I’ve long warned that this recovery would prove uneven and lackluster relative to prior postwar rebounds, I still expect the US economy to firm up in coming months. That being said, investors need to protect their portfolios against the volatility that’s part and parcel of a slow-growth environment.

CurrencyShares Swiss Franc Trust (NYSE: FXF) is one investment vehicle that actually runs up when things are looking down. This exchange-traded product can assuage your anxiety when the stock market tumbles and the media reports that the sky is falling.

A bastion of sanity in a debt-crazed world, Switzerland has long run a tight monetary policy and historically has avoided the inflationary pressure that afflicts other economies. The Swiss government’s debt amounts to roughly 28 percent of the country’s gross domestic product (GDP). By way of comparison, the ratio of sovereign debt to GDP stands at 60 percent in the US and 120 percent in Italy. Meanwhile, Switzerland’s unemployment rate is only 3.5 percent, and its quarterly economic growth has consistently trumped analysts’ consensus forecasts.

As a non-EU country, Switzerland runs its own fiscal and monetary policies and, unlike France and Germany, has avoided the taint of the ongoing sovereign-debt crisis afflicting the fiscally profligate “Club Med” countries (Greece, Italy and Spain).

Investors regard the Swiss franc as a safe haven and have plowed money into the currency over the past few months. From mid-May to mid-August - the duration of the summer swoon - the Swiss franc appreciated by more than 25 percent relative to the US dollar.

The franc’s rapid appreciation, particularly relative to the euro, has prompted the Swiss National Bank (SNB) to slash interest rates to slow the currency’s meteoric rise. These efforts have met with little success. Speculation that the SNB might peg the currency to the euro ultimately halted the franc’s bull run, though most analysts dismiss such a move as unlikely; purchasing massive amounts of euros would create additional problems for the central bank and fly in the face of its commitment to price stability.

The franc’s recent pullback amid improving US economic data provides a favorable entry point for investors seeking to hedge against further downside in the broader market. With US investors struggling to adjust psychologically to the reality of a slow-growth environment and the EU sovereign-debt crisis moving haltingly toward a resolution, rest assured that additional volatility is in the cards.

CurrencyShares Swiss Franc Trust is an excellent tool for achieving pure exposure to the franc-greenback exchange rate. Rather than investing in currency futures, the fund deposits its assets into an interest-bearing, franc-denominated bank account. The interest collected from the account covers some of the fund’s expenses, reducing the cost incurred by investors. The exchange-traded fund distributes any excess interest to shareholders.

This structure ensures that the fund’s performance closely mirrors movements in the franc’s value relative to the dollar.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.