Bet on the dollar
Currency trading used to be a strategy employed by only the wealthiest investors and hedge funds, but a growing number of mutual and exchange traded funds make it possible for individuals to try it for themselves, with significantly smaller amounts of money.
In the past, if you wanted to trade currencies, you’d need thousands of dollars to establish even a minimal position using futures contracts, said Jim King, director of portfolio management at Rydex Investments. Now do-it-yourselfers can get exposure through funds for a lot less – as little as $1,000, depending on the minimums required by your fund supermarket.
The Rydex Strengthening Dollar Fund (RYSBX) and the Weakening Dollar Fund (RYWBX), launched last May, along with the first currency ETF, the Euro Currency Trust (FXE), launched in December, allow regular folks to speculate on the direction of the dollar or hedge currency exposure in portfolios heavy in foreign stocks.
In effect, this is “bringing a hedge fund-type strategy to the common man,” King said.
The question is, does the common investor really need to be messing around with hedge fund strategies? Some experts are skeptical about whether such funds are necessary in the average person’s portfolio, particularly if it’s well-diversified, with adequate exposure to international equities. Furthermore, the 1.7 percent expense ratio Rydex charges for its strengthening and weakening dollar mutual funds makes them an expensive gamble, said Richard A. Ferri, chief executive of Portfolio Solutions in Troy, Mich.
“The buy-and-hold investor has no business being in this kind of fund at all, because it’s purely speculative,” Ferri said. “It’s not for any of our clients, that’s for sure. We get currency diversification, but we get it for free because we own international equities in our portfolios through index funds. These funds are for traders, they’re for speculators. If that’s what you want to do – speculate on the value of the dollar – and you think you can beat the system, good luck!”
So, in theory, how might you use these funds? The first method – and probably the riskiest – is to speculate on where the dollar is going. If you have some macro view on the economic climate, and believe the dollar is poised to strengthen or weaken, you could make a bet with the appropriate fund. If asset levels are any indication, more people are expecting the dollar to weaken before it grows stronger. The strengthening dollar fund currently holds just $10 million, while the weakening dollar fund is close to $50 million.
As international investing has become more popular, King said, investors have started using currency funds for hedging purposes. For example, if you own a fund that is mostly invested in European equities, and the manager doesn’t hedge for currency exposure, you could do it yourself if you wanted to. Alternatively, if you own a fund where the manager does hedge out currency exposure, you could add it back in by buying the weakening dollar fund.