Betting on a Falling Dollar With Foreign Bond ETFs and Closed-End Funds (BGT, EDF, EFL, ESD, FAM, FAX, FCO, MSD, TEI)

by: David Jackson

Raymond James strategist Jeffrey Saut is one of the few Wall Street Strategists to translate his views about the market overall into specific recommendations to buy or sell closed-end funds and ETFs. Here's an excerpt from his most recent weekly essay in which he predicts a decline in the dollar this year and recommends a closed-end foreign bond fund, the Aberdeen Asia-Pacific Income Fund (NYSEMKT:FAX):

On interest rates, we have clearly been wrong, believing that in a finance-based economy the Fed would stop its rate-ratchet around 3.5% - 3.75%. Hereto, despite the pickle-pundits’ cries that the “Fed is done,�? it appears to us as if the Fed is going to continue raising rates until there is an “accident�? consistent with its historic modus operandi. While such action should be bullish for the dollar, we continue to expect the dollar to lose its tailwinds (foreign earnings repatriation, Homeland Investment Act, Europe raising rates, etc.) this year. And, last week China fired another “shot across the dollar’s bow�? when it intimated that it was going to diversify more of its reserves out of U.S. dollars. Maybe that is one of the reasons our anti-dollar investment in 6.8%-yielding Aberdeen Asia-Pacific Income Fund (FAX/$6.14) has rallied 5.9% since December 30, 2005, yet still trades at a 5.2% discount to its net asset value.

There aren't many foreign bond funds -- whether closed-end or ETFs. (Why hasn't Barclays, PowerShares or StateStreet released a foreign bond index ETF? No idea -- it's a no-brainer.) FAX is one of the only ones; others include:

  1. Salomon Brothers Emerging Markets Income Fund II (NYSE:EDF)
  2. Salomon Brothers Emerging Markets Floating Rate Fund (EFL)
  3. Salomon Brothers Emerging Markets Income Fund (NYSE:ESD)
  4. First Trust/Aberdeen Global Opportunity Income Fund (NYSE:FAM)
  5. Aberdeen Global Income Fund (NYSEMKT:FCO)
  6. Morgan Stanley Emerging Market Debt Fund (NYSE:MSD)
  7. Templeton Emerging Markets Income Fund (NYSE:TEI)

(You can read articles about all these closed-end funds by clicking on the ticker symbols below the title of this article on

Interestingly, in the Barron's Roundtable this weekend PIMCO bond king Bill Gross recommended a closed-end fund that invests in bank loans, the BlackRock Global Floating Rate Income Trust (NYSE:BGT), partly because "this particular fund is 30% invested outside the U.S. It’s a currency play to some extent. Some of the largest holdings include emerging-market debt and Fannie Mae and Federal Home Loan Bank instruments."

Why invest in closed-end bond funds when ETF investors also now have a direct way to play currencies -- the Rydex Euro Currency Trust (NYSEARCA:FXE), which holds Euros in a money market account? Geoffrey Saut probably prefers FAX to FXE as a play on dollar devaluation because FAX trades at a discount to net asset value, offers a higher interest rate, and has exposure to other foreign currencies, not jus the Euro.

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