Analyste de Boston

Getting a Handle on Currency ETFs

In a diversified portfolio >$100k, currencies can be considered a "fixed income alternative" - if you understand the risks are different, you monitor your investments, etc.

For most IRA investors, prudent allocation is probably < 10% to all currency plays. In my Model (7% allocation) that's a YTD nav +0.54% vs. -0.34% for the AGG (which has a higher yield, however.) You can see these gains quickly erode in periods of crisis/deleveraging: definite NOT SUITABLE as 'buy-&-hold' investments!

I prefer foreign bond funds (like WIP & PCY) for more significant and longer term Fxd Inc allocations.

New ETF Offers Access to Diverse Emerging Market Currencies

I like that investors can access currency ETFs, and I think they can be excellent opportunistic trend plays when the Market punishes US fixed income & the Dollar.

That said, I wonder what allocation (range) is suggested here:
"Tip: Keep CEW as one your currency plays along with the Canadian (FXC) and Australian (FXA) dollar." Don't know I'd recommend all three of these currency ETFs to the avg investor, simultaneously. (Arguably, CAD & AUD are an either-or complement with CEW, however.)

Beware ALL currency ETFs except UUP if any hint of another deleveraging wave or worsening financial crisis precipitates in Eastern Europe. 'Flight to quality' - into USD$ investments - really hurts these ETFs, caveat emptor.

Rising Interest in Currency Funds

Oh, I don't hit "Reply" because I find long, repeat text a huge nuisance to scan. Sorry if this led to your confusion about my 2nd Reply. Thanks!

Rising Interest in Currency Funds

Richard, I was responding to RiskReturnOptimizer in my second reply. (You replied before me, out-of-sync.)

I have the greatest respect for your work, and my first Reply was simply an Addendum. I think we're all on the same page, but I do play Devil's Advocate when I see so many articles chasing a hot sector. This one definitely needs caveats.

Someone has to underscore the currency risks, especially when those ETFs are flying and getting "rising interest" no?

Two Cases Against Active Management

The Brinson, Hood, and Beebower study is the most widely quoted & misunderstood studies in portfolio management, yes.

Nuttall & Nuttall did a study (1999) showing 50 published statements regarding BHB, 49 were fundamentally wrong and the one correct version was later changed to ... wrong!

If a study is so consistently misunderstood, what does that say?

Rising Interest in Currency Funds

I'm reluctant to take fund companies promotional claims at face value. Does your purported long term average annual return (before inception) include ALL costs & taxes?

I also wonder why you'd compare DBV to the SPY, much less consider it a "core holding" (>15%?) If you're an aggressive investor, you also understand that most people don't intentionally share that risk-tolerance.

Considering the NAV alone, DBV lost -26% since 10/9/07, the onset of the Great Bear Mkt. Isn't its performance closer to a junk bond fund? Maybe that's a way to consider suitability for a client or investor : "Would you feel comfortable investing in junk bonds?"

As a "core holding," I very much doubt that's appropriate for most investors.

Rising Interest in Currency Funds

I jumped on the currency ETF bandwagon relatively early, back in 2006. My experience hasn't been bad, but CAVEAT EMPTOR! with currency funds.

Most investors don't have assets to reasonably invest in spot, and futures contracts are likewise too esoteric for the mutual fund crowd. (Be reasonable.) I'll also exclude large institutional hedgers, bigger clients >$5mln investable assets, gamblers and day-traders from what follows, my own opinion if/how these currency ETF/ETNs suit most retail investors.

For diversified IRA accts and the portfolios of small shop investment advisors, the forex allocation is probably just a TREND TRADE. Currency plays are a much riskier alternative within fixed income: a 3-15% allocation might be suitable for some investors but probably NOT "most." Why?

Consider the RISK carefully : from 7/17/08-10/27/08, FXE lost -21%, FXA lost -38% FXS lost -25%, BZF lost -28%, etc. A second wave of global deleveraging will almost certainly entail similar losses. Those anticipating big equity declines tomorrow shouldn't overweight forex now: once burned, twice shy. Have we learned anything?

These aren't set-it-forget-it investments, people! Given the OLD story of the Dollar's purported weakness, I will continue to use a couple of currency plays going forward, but in 2008 the gain on a prudent allocation was only about 100-150bps over FDRXX (15%, with trading exits, entries and switches.) If 2009-2010 proves so volatile as last year, expect losses with many currency ETFs.

Final assessment:
Given the fractional allocation and constraints on resources (honestly factoring time, due-diligence, understanding & tracking the forex mkts, opportunity costs, etc.) most advisors & long-term investors will likely seek greater alpha for smaller accts elsewhere.

The Reflation Trade Portfolio

>I don't think this should be 100% (or even 50% or 25%) of someone's portfolio.<

Agreed, not ALL of one's portfolio but perhaps 50% (against your core 50%) in a 70/30 portfolio monitored quarterly. Nothing wildly exotic here, btw.

Is VWO plus EWC & GXC somewhat redundant? (China & Brazil are the Top Countries held by VWO, 25%.)

Hougan's Reflation Trade Portfolio: Playing with Fire

I realize you two have a back-&-forth, but shame on you, Jim: the Straw Man argument is so transparent.

According to Matt, "CNBC asked me to pull together a list of seven or eight ETFs that stand to benefit from reflationary trends." Nothing implies that portfolio is designed for retirement savers, retail Joe-Six-Pack investors, or everyone looking for an investment model. Nothing indicates universal suitability or risk-tolerance, not at all: it's SIMPLY a "reflation trade portfolio."

True, there's no caveat or warning for 80 year old investors, but like many articles on SA and elsewhere, there's only so much space on the page. The strategy is clearly an academic exercise, not advice directed towards retirement savers.

In the future, please avoid this kind of Straw Man retort, it's a dull, cheap & trashy kind of reply.

The Five Best ETFs for a Falling Dollar

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.