How To Profit From A Stock Market Crash, Part IV: Capitalize On Devaluing Currencies

by: Epsilon

<<Back to part III

In an attempt to stimulate our weakened economy and prevent a possible economic depression, the Federal Reserve has continued to flood our economy with U.S. Dollars (USD). This continual printing of our currency, and the potential resulting devaluation of the U.S. Dollar, could eventually do more harm to our economy than good.

Being a conservative investor, I would prefer the safety of gold or other precious metals in the event of a significantly deteriorating dollar. However, inverse currency ETFs, much like the inverse equity ETFs mentioned in Part II of this series, offer savvy investors an additional way to bet against a currency.

PowerShares DB US Dollar Bearish Fund (NYSEARCA:UDN), which moves inversely to the Deutsche Bank Long U.S. Dollar Index (USDX) Futures Index, is an inverse currency ETF that will rise as the value of the dollar falls. This ETF "is designed to replicate the performance of being short the U.S. Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc".

Though the ETF's trading volume is staggeringly low (142k daily average), this does provide a more liquid option than gold or other precious metals when betting against the dollar.

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Similarly, and accompanied with much more concern than the U.S. Dollar as of late, the euro (EUR) also has a related inverse ETF that will rise as the value of the currency falls. ProShares UltraShort Euro (NYSEARCA:EUO) "seeks daily investment results that correspond to twice (200%) the inverse of the daily performance of the U.S. Dollar price of the euro".

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Though the euro has been under fire, a Greece bailout could strengthen the currency and, in turn, drive down the ProShares UltraShort Euro ETF. But bailout or no, the euro isn't out of the woods just yet and if the currency continues to struggle, look for a continued rise in this ETF.

Below is a list of additional inverse currency ETFs for reference:

Symbol Name Tracks Leverage Inverse to Average Volume
UDNT PowerShares DB 3x Short US Dollar Index Futures Exchange Traded Notes Deutsche Bank Long U.S. Dollar Index Futures Index - Excess Return 3x n/a 2,481
UDN PowerShares DB US Dollar Bearish Fund Deutsche Bank Short US Dollar Index (USDX) Futures Index 1x UUP 185,877
DRR Market Vectors Double Short Euro ETN Double Short Euro Index 2x URR 79,925
EUO ProShares UltraShort Euro Euro 2x ULE 5,113,944
YCS ProShares UltraShort Yen Japanese Yen 2x YCL 293,995

In summary, and as this series has shown, stop loss orders, precious metals, and inverse ETFs are wonderful tools that investors should use to protect capital and turn a profit in a bear market. As they say, hope for the best, plan for the worst.

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

Additional disclosure: The use of inverse ETFs is generally recommended as a short term investment strategy only.