The Big Picture For The Week Of August 12, 2012

by: Roger Nusbaum

iShares filed for 14 currency ETFs that it will actively manage, assuming the funds list. The currencies are as follows:

  • Australian dollar

  • British pound

  • Canadian dollar

  • Chinese renminbi

  • Euro

  • Japanese yen

  • Mexican peso

  • New Zealand dollar

  • Norwegian krone

  • Sing dollar

  • Swedish krona

  • Swiss franc

  • Thai baht

  • Turkish lira

Rydex had the first currency ETFs a few years ago. Then WisdomTree came in filing for just about every currency on the planet, but only actually brought a handful of them to the market. Interestingly, most of them are still in registration according to IndexUniverse.

I was asked to comment on the iShares filing for an article and I made the observation that a line of currency funds seems to be consistent with iShares' line of single country equity funds and makes me wonder whether a line of single country bond funds can be close behind? PIMCO and WisdomTree have made some inroads here, but not on an iShares-ian scale.

The exposure and access to currency is useful and valid for those who are inclined to put in the time needed to understand the dynamics of that market. Once someone has made that time commitment, there are several potential uses for a broad array of currency ETFs.

The more plain vanilla way to use currency ETFs would be a small exposure in a "normal" 60/40-ish portfolio. This might mean buying something like the Turkish lira as a sort of carry trade or maybe buying the Sing dollar as some sort of safe haven.

Another potential strategy and more interesting to talk about is one we've talked about before which is Nassim Taleb's idea from quite a few years back, which is to put 90% into T-bills (or just the currency) from various countries and then go berserk with the other 10% ('go berserk' is my word not his). This is intellectually appealing on some level, even if an unlikely type of positioning, and would be easy to construct with a wide scale of choices. Perhaps a more realistic version would be 5-7% in a basket of currencies.

The other application that is more interesting to talk about is in terms of the cash allocation in a permanent-style portfolio. For anyone not familiar, the original permanent portfolio was conceived by Harry Browne 30 years ago, that has equal allocations to gold, long bonds, cash and equities (equities via a broad index fund). There have been a few investment products launched that are based on the Browne idea.

Over the years I've posted quite a few times exploring different ways to come at this including a foreign permanent portfolio. Someone who lives in Sweden might only think about this in terms of Swedish stocks, bonds and cash. However someone from a country with a more volatile history, like maybe Argentina, might want a more global approach.

Browne was talking about U.S.-based and indexing, but there is no reason that each asset class couldn't be global or actively managed to whatever degree comfortable.

For people willing to take the time to learn, the permanent portfolio is an interesting concept but it can evolve with the realities of the world. The relative prospects of the U.S. are not what they used to be and with the U.S. 30 year bond under 3%, it may not make too much sense to put 25% of your money into that space.

Of the four, the one I wouldn't tinker with is gold, at least not in terms of using other commodities. Personally, 25% is way too much gold, but other commodities tend to be more tied to the economical cycle than gold (which really is more about emotion, one way or another). As a note, the 'idea behind the idea' of the permanent portfolio is that there is always at least one thing doing well. Cyclical things like stocks and industrial commodities are more likely to correlate together than stocks and gold.

Today's world might mean a basket of country funds for equities, bonds (if that ever becomes doable) and cash (if the above funds list). There are obviously some bond funds and some currency funds, but I think only the single country equity funds offer comprehensive choices for investors.

Increased choices along these lines are in my opinion democratizing for do-it-yourselfers. But it is crucial that the proper amount of time be put in before using products like these, and time must also be spent monitoring various currencies. The potential for incorrect use is pretty high.