That was my thought as I read through this article from the Associated Press about the Rydex Currency OEFs. The article quoted an investment advisor from Michigan named Richard Ferri as saying, "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!"
Wow. I don't think it makes sense to take this kind of stand with a potentially "new" asset class. Currency funds like the Rydex OEFs, the one ETF and the currency funds from ProFunds are all about ten minutes old. There are a couple of older OEFs out there but they are fairly small for now.
One of the first things I ever wrote on this site was that in the coming years there would be investment products providing access to markets that were previously not easily accessed. I mostly had commodities and currencies in mind.
The role that currencies might play is just starting to evolve. I may be right or wrong about currency exposure becoming very important. At this point it is unknown and I am only stating my opinion. That the role currency could play is unknown means that it should not be ignored, as far as your education.
To address the quote above and the comments that are bound to be left on this post, if you recall the early days of ETFs, there were more negative opinions than positive opinions in those days. Now ETF growth is dwarfing OEF growth and there is visibility for ETF growth to accelerate because of how useful the products are.
Even so, do you really think there aren't people out there that have blown themselves up using ETFs incorrectly? Wouldn't it be logical to believe that, like every other investment product ever created some folks have been too aggressive, over traded, had poor timing and leveraged themselves improperly with ETFs?
I'm gonna say yes. And when currency funds and ETFs are up and running with some track record there will be investors that misuse them and get pasted in the process. In this regard they will be no different.
In the quote above, Mr. Ferri notes that his clients get currency exposure through international funds. That is hard to disagree with. Aren't foreign bonds different from foreign stocks? I know have exposure to both for my clients and chances are Mr. Ferri does too. If you think about your allocation in terms of stocks, bonds and cash (we could add REITs and commodities but let me keep it simple for now) and you see the potential value in foreign stocks and foreign bonds shouldn't foreign cash at least be studied a little before it is ruled in or ruled out? Stocks, bonds and foreign cash.
This will not be appropriate for plenty of investors but closing the door is the last thing I'm going to do.
Wikinvest Wire
10 comments:
Good point. There seems to be an evolutionary process occurring w/ currencies with increasing numbers of countries building a basket of reserves - mostly $USD now perhaps but increasingly diversified I think - to protect their own currency and/or peg it to a stronger currency/currencies. This isn't just the case with China and Japan, even Norway has a considerable 'endowment fund' built up I believe. Precious metals may or may not have a role to play in this (most likely transitional but who knows). It may be that, in time, many global assets will effectively become priced in an investor's home currency as a result (at least in countries with sufficient reserves) but that time isn't now. Understanding currencies better whether one wishes to invest directly in them or not makes sense regardless, particularly if the process (assuming it is occurring) becomes something less than gradual.
RW
Roger, I like the direction from which you approach the question. But does it make sense to think of foreign currencies as the same kind of asset class as cash in your domestic currency? After all, what's the difference between cash and bonds? Cash is a) perfectly liquid and b) guaranteed not to decline in nominal value. While a foreign currency ETF is pretty close to a) it is nowhere near b). So how can it be compared to a money market fund or savings account?
Thanks RW.
To the second question. You may be correct. This is a theory that is evolving. The theory may or may not stand up up. I mentioned in a previous post the notion of allocating 20%-30% of a cash allocation into a coming foreign currency ETF.
For someone that is 65% stocks, 25% bonds and 10% cash this would mean 2%-3% of the entire portfolio in a forex ETF. A 10% move, which is big for a currency would result in 20-30 basis point effect. This is about counter strategy for a potentially serious weakening that I think could occur over the next couple of years
Well on this topic I will have to disagree with Roger most of the time ( I am sure you are shocked).
Stocks have the best long term potential yield. Short term fluctuations in stocks or currencies are very difficult to predict. I prefer to invest for the long term not trade.
I agree with you about the future of the US dollar being poor, but I don't think it will be quick. It is more likely to be slow and tortuous with unexpected volatility.
It is not like I do not have forieg currency exposure. Approximately 2/3 of my portfolio is over seas. The one thing that will be very useful about currency etf's is the ability to reduce your exposure to foriegn stock markets while still keeping the currency hedge.
So I will concede there is a place for currency etf's. My concern is that most people will simply trade these currencies when they should be investing most of the time. Foriegn stocks (etf's) will continue to be my preffered method to invest and hedge against the eventual dollar decline.
flaws in human trading behavior make the product bad?
No, concentrating on trading as oppossed to investing is bad for ones portfolio.
Stocks can increase market share or create new products. Stocks are great investments and if I can get currency increases on top great.
Currecies and their fluctuations are a trade not an investment, even if the new "product" is a heck of a lot better than the old way of trading currencies.
FXE hasn't been around long enough for accurate beta calculation, but
eyeballing its performance superimposed on the S&P chart leads me to believe the beta is between .95 and 1.05. In other words, it is more volatile than many people suppose, and investing more than 2%-3% of your assets could be perilous. While unlikely, scenarios can be imagined where the dollar could rally sharply and for a long time!
so I make my point that it seems like you are more concerned about human behavior, you say no but then say concentrating on trading is bad?
I am not going to change your mind but hopefully readers see the focus of these comments is flaws in human nature.
Anyone thinking about using a currency product needs to apply some introspection to know if they are likely to succumb to these very human flaws and trade too much.
yes there are flaws in human nature. This we agree on.
But currency products are not an investment. They are a trade.
I see flaws in both human nature and the currency trade.
I will concede the new products are an improved way to currency trade. But improved trading is still trading.
I am not sure that foreign currencies are always a trade, especially if your view is "[the decline of the USD] is more likely to be slow and tortuous with unexpected volatility." Sounds to me like you've identified a long term trend that one can buy now, hold through the ups and downs of short term volatility, and come out with a solid return over the long term. Sounds more like an investment than a trade.
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