The dollar is looking heavier than cement boots. How can you profit from the dollar’s weakness without shorting the dollar? A common way to make money in a floundering security without shorting is to find something that moves up when the floundering security moves down. Shorting, especially with ETFs, can be a dangerous proposition if what you are shorting moves against you. In the last 12 months there has been tons of articles written about the dangers of holding short positions too long (more than a few days). The longer you short the more likely you will not achieve the results one would expect even if what you are shorting declines. This is especially true in volatile markets.
The long and short of it
The dollar has been in decline for years and is expected to continue its drop for more than one reason. Some of those reasons are:
- The dollar is the carry currency in the carry trade. Remember there are two sides to the carry trade; the place where money is being borrowed and the place where the investments are flowing. The process of the carry trade requires that one sells the carry currency (US Dollar) and buys foreign currencies. Selling the dollar drives the value of the dollar down versus foreign currencies.
- As investors are more willing to take on risk by investing in stocks and other risk assets they will sell the dollar that they flocked to for safety in the recent downturn.
- The printing presses of the US Government will weaken the dollar as more dollars are put in motion.
So, what goes up when the dollar goes down? One option is commodity based currencies like the Australian and Canadian dollars which you can gain exposure to through Currency Shares ETFs. Playing the currency markets can be a little dicey. If we look further, we can find other options. Foreign stocks and bonds tend to do well in a weak dollar environment as it boosts the value of securities. Especially those assets denominated in currencies strengthening against the dollar (so long as the investments in the foreign securities are not hedged).
Tale of two pictures
One of the potentially less volatile ETF plays to profit from a falling dollars is is the SPDR Barclays International Treasury Bond ETF (ticker BWX). BWX invests in high credit quality foreign government bonds. Currently, the fund yields just under 4% and is up 7.51% ytd. BWX is well above both its 50 and 200 day EMA. Take a look at the two pictures below. One is the 6 month chart of BWX and the other is of the 6 month chart of PowerShares DB US Dollar Index Bullish (ticker UUP). Please note the direction of BWX versus UUP. Again, BWX is up 7.51% YTD and UUP is down -7.61% YTD.
The nice aspect of BWX is it has merit as an investment regardless of the direction of the US Dollar. The perk is that BWX’s performance gets a shot in the arm with a weak dollar.
Charts courtesy of StockCharts.com
Disclosure Statement: ETFGPS is a blog that Navigates The World of ETFs. Sustainable Investment Strategies LLC is a Registered Investment Adviser in the State of Maryland, and does hold positions in the BWX ETF at the time of writing. Investors who are interested in money management services may visit the Sustainable Investment Strategies LLC web site.