Markets

Should You Diversify Away from the Dollar?

Despite its impressive status as the world's reserve currency, it's no secret the U.S. dollar has been on a long steady secular decline. And the forces driving this trend are mostly internal. Loose goose monetary policies coupled with a spendthrift government are direct contributors to the dollar's waning buying power.

How can you defend yourself against a falling US dollar?

Own Physically Backed Assets

One way to protect against a declining dollar is to own assets not correlated or inversely correlated to the dollar. In this regard, investing in metals like gold and silver have enjoyed a new found resurgence in popularity. Investing in gold or silver can be done by purchasing coins, bars or jewelry. The disadvantage of owning physical metal is you need to store and insure it.

Precious metals ETFs are another easy way to invest in metals. Physically backed trusts, like the SPDR Gold Shares (NYSEArca: GLD) has over $60 billion in assets and is the largest gold ETF in the world. Its share price reflects one tenth the ounce price of gold bullion, which currently trades around $1,590 per ounce. The iShares Silver Trust (NYSEArca: SLV) offers market exposure to silver bullion. SLV has risen 26.87% year-to-date compared to GLD's 13.70% gain.

If you're not sure which specific metal to own, the ETFS Physical PM Basket Shares (NYSEArca: GLTR) offers 4-in-1 exposure to gold, silver, platinum (NYSEArca: PPLT) and palladium (NYSEArca: PALL).

The taxation of precious metals investments is currently treated as a collectible which is a maximum capital gains rate of 28%. These tax rates also apply to gains in both gold and silver ETFs that are backed by the physical asset.

Adding International Exposure

Here's another easy way to diversifying away from the U.S. dollar: Buy and hold foreign ETFs.

Because virtually all international and emerging markets stock and bond ETFs offer unhedged currency exposure, you get more than just equity and bond diversification.

Broadly diversified international ETFs like the Vanguard FTSE All-World ex-US ETF (NYSEArca: VEU), iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) and the SPDR MSCI ACWI ex-US ETF (NYSEArca: CWI) offer both equity and currency diversification.

Alternative Currencies

Currency ETFs allow you to capitalize on the strength of foreign currencies relative to the U.S. dollar. Whenever a U.S. investor buys a foreign currency ETF like the British Pound (NYSEArca: FXB) or Japanese Yen (NYSEArca: FXY) they are automatically short the dollar in the corresponding currency. This type of strategy allows you to hedge against weakness in the dollar.

As the intrinsic value of paper currency becomes more doubtful, not all paper currencies will necessarily perform poorly. While overweighting precious metals inside your portfolio like everyone else is most certainly a popular trade, caveat emptor whenever large crowds agree with each other. For that reason, we highlighted in our latest Weekly ETF Pick one particular currency ETF we think is a good paper alternative in a world of diminishing choices. It's ahead by more than 7% since we first featured it and more gains are likely ahead.

Good Market Timing

Now more than ever, it's vital to protect your assets. Over the past few years, we've witnessed the unprecedented destructionof trillions of dollars in capital. And unfortunately, the demolition party isn't yet over.

While most financial professionals will tell you about the important of securities diversification, only the very best will warn you about the growing importance of currency diversification. When is the best time to do this? Before the storm, not during it.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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