The falling dollar may have made you think twice before booking that holiday to Chamonix.
But investors in exchange-traded funds - baskets of securities designed to track indices and trade like stocks - are discovering a variety of ways to profit betting against the greenback. The dollar's six-year slide has continued in recent months, and in November sterling traded above $2.11 for the first time since 1981.
The pound is up against the dollar about 34 per cent from five years ago, and about 10 per cent in the past 12 months. Meanwhile, the euro has risen 15 per cent against the dollar over the past year and 47 per cent in the past five years.
Ron DeLegge, editor of etfguide.com, an independent newsletter, says many ETF groups have recently introduced a slew of investment vehicles to make it easier for small investors to participate in global currency markets. "There's a lot more interest from investors who want to use different techniques to hedge against the dollar," he says. "You're not getting these offerings in mutual funds, so investors are gravitating towards ETFs."
ETFs have been the investment phenomenon of the past five years on Wall Street and Main Street. The first ETFs - introduced by State Street in 1993 - mimicked big stock indices such as the S&P 500. They were similar to traditional index funds, but had lower fees and were more tax-efficient. Today, however, there are more than 560 ETFs on the market, according to the Investment Company Institute.
DeLegge says investors looking to hedge against the weak US dollar are, for the most part, snapping up currency and gold ETFs. But perhaps the most straightforward way is by increasingly backing foreign equity ETFs. "Owning foreign equities hedges you not only against the dollar but also against a weakening economy," he says.
This year alone, assets within ETFs have grown by $167bn to $584bn, according to industry data. About $67bn, or 40 per cent, of that was dedicated to internationally focused ETFs.
Robert Huebscher, chief executive officer of Advisor Perspectives, the group that studies the investment trends of high and ultra-high net worth investors, says many advisers tend to shy from investing in currencies in favour of backing ETFs with foreign exposure. "For most, the currency markets are too hard to understand and predict," he says. "The smartest advisers are putting substantial amounts into foreign equity ETFs. They're betting on the fundamentals of non-US economies and non-US companies. This way, they're hedging their currency exposure and they can do just as well."
Most providers offer an array of international products. Vanguard offers ETFs including European, Pacific and emerging markets, while Barclays Global Investors - the biggest ETF provider in the US - offers more than 30 international ETFs.
There are also ETFs specifically designed to make leveraged bets on currencies. Rydex Investments and Powershares - two managers that have carved a niche in fund management by providing mutual funds with leveraged short and long attributes - offer ETFs that enable investors to short the dollar.
Rydex offers Eight CurrencyShares, a series of ETFs that track the price of eight currencies. Each holds one currency: the euro, Japanese yen, sterling, Australian dollar, Canadian dollar, Mexican peso, Swedish krona or Swiss franc.
An investor buys shares in a trust, and their value increases or decreases with the value of the currency relative to the US dollar. In other words, if the dollar drops, the shares gain. Meanwhile, Powershares offers both a bullish and bearish US dollar fund, based on Deutsche Bank's long and short US dollar indices. The indices are rules-based and composed solely of long or short futures contracts.
These are predominantly aimed at hedge funds and big institutions, says DeLegge, but they represent "the most direct play you can make on the dollar going down. "A lot of people don't understand, when you take a position in any one of those ETF products you're automatically shorting the dollar, because you're bullish on that other currency That's an important point."
Gold is another option for those seeking refuge from the dollar, says DeLegge. "Gold has historically been viewed as non-correlated asset - an area that does well when the greenback is collapsing," he says. "Investing in a gold ETF is a hedge against the dollar and also an inflationary measure."
State Street was the first to market with a gold ETF - the streetTracks Gold Shares - and now has $166bn in assets. State Street's ETF is 0.45 correlated to the dollar, according to Tom Anderson, director of strategy and research at State Street Global Advisors, which means that it has a strong but not infallible tendency to rise as the dollar falls. Its shares represent a 10th the price of an ounce of gold bullion.
The downside to ETFs, however, is their tax treatment, says DeLegge. Investors in these ETFs are treated as though they own "collectables", which means any long-term gains will be taxed at a maximum 28 per cent rate.
But investors in exchange-traded funds - baskets of securities designed to track indices and trade like stocks - are discovering a variety of ways to profit betting against the greenback. The dollar's six-year slide has continued in recent months, and in November sterling traded above $2.11 for the first time since 1981.
The pound is up against the dollar about 34 per cent from five years ago, and about 10 per cent in the past 12 months. Meanwhile, the euro has risen 15 per cent against the dollar over the past year and 47 per cent in the past five years.
Ron DeLegge, editor of etfguide.com, an independent newsletter, says many ETF groups have recently introduced a slew of investment vehicles to make it easier for small investors to participate in global currency markets. "There's a lot more interest from investors who want to use different techniques to hedge against the dollar," he says. "You're not getting these offerings in mutual funds, so investors are gravitating towards ETFs."
ETFs have been the investment phenomenon of the past five years on Wall Street and Main Street. The first ETFs - introduced by State Street in 1993 - mimicked big stock indices such as the S&P 500. They were similar to traditional index funds, but had lower fees and were more tax-efficient. Today, however, there are more than 560 ETFs on the market, according to the Investment Company Institute.
DeLegge says investors looking to hedge against the weak US dollar are, for the most part, snapping up currency and gold ETFs. But perhaps the most straightforward way is by increasingly backing foreign equity ETFs. "Owning foreign equities hedges you not only against the dollar but also against a weakening economy," he says.
This year alone, assets within ETFs have grown by $167bn to $584bn, according to industry data. About $67bn, or 40 per cent, of that was dedicated to internationally focused ETFs.
Robert Huebscher, chief executive officer of Advisor Perspectives, the group that studies the investment trends of high and ultra-high net worth investors, says many advisers tend to shy from investing in currencies in favour of backing ETFs with foreign exposure. "For most, the currency markets are too hard to understand and predict," he says. "The smartest advisers are putting substantial amounts into foreign equity ETFs. They're betting on the fundamentals of non-US economies and non-US companies. This way, they're hedging their currency exposure and they can do just as well."
Most providers offer an array of international products. Vanguard offers ETFs including European, Pacific and emerging markets, while Barclays Global Investors - the biggest ETF provider in the US - offers more than 30 international ETFs.
There are also ETFs specifically designed to make leveraged bets on currencies. Rydex Investments and Powershares - two managers that have carved a niche in fund management by providing mutual funds with leveraged short and long attributes - offer ETFs that enable investors to short the dollar.
Rydex offers Eight CurrencyShares, a series of ETFs that track the price of eight currencies. Each holds one currency: the euro, Japanese yen, sterling, Australian dollar, Canadian dollar, Mexican peso, Swedish krona or Swiss franc.
An investor buys shares in a trust, and their value increases or decreases with the value of the currency relative to the US dollar. In other words, if the dollar drops, the shares gain. Meanwhile, Powershares offers both a bullish and bearish US dollar fund, based on Deutsche Bank's long and short US dollar indices. The indices are rules-based and composed solely of long or short futures contracts.
These are predominantly aimed at hedge funds and big institutions, says DeLegge, but they represent "the most direct play you can make on the dollar going down. "A lot of people don't understand, when you take a position in any one of those ETF products you're automatically shorting the dollar, because you're bullish on that other currency That's an important point."
Gold is another option for those seeking refuge from the dollar, says DeLegge. "Gold has historically been viewed as non-correlated asset - an area that does well when the greenback is collapsing," he says. "Investing in a gold ETF is a hedge against the dollar and also an inflationary measure."
State Street was the first to market with a gold ETF - the streetTracks Gold Shares - and now has $166bn in assets. State Street's ETF is 0.45 correlated to the dollar, according to Tom Anderson, director of strategy and research at State Street Global Advisors, which means that it has a strong but not infallible tendency to rise as the dollar falls. Its shares represent a 10th the price of an ounce of gold bullion.
The downside to ETFs, however, is their tax treatment, says DeLegge. Investors in these ETFs are treated as though they own "collectables", which means any long-term gains will be taxed at a maximum 28 per cent rate.
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