Ok, theory time.The other day I passed a long a snippet about Rydex adding four more currency funds, a couple would be new ground and a couple would not.
I don't know how off the beaten path the ETF industry will get with currency funds but there are going to be a quite a few currencies that will continue to go up a lot against the dollar, not necessarily because of the dollar's problems but because of what is happening on the ground in some of these places.
In a practical sense I believe in adding some currency into a diversified portfolio, be that actual currency (via ETFs) or using short term sovereign debt but the dollar will have periods where it outperforms some of the biggies.
If Europe is a little behind us right now in its economic cycle and their recession is worse than ours, how do you think EURUSD is going to do? In 2018 we may look at a ten year chart of EURUSD see that it was a one way trade but that would not preclude the dollar going on a run versus the euro for a couple of years.
So could a portfolio of currencies be put together using ETFs and short term sovereign debt in such a way where either it gives broad equity market like returns or one of those 80% of the upside with a quarter of the volatility?
Less volatility is a pretty good bet, currencies are generally less volatile than equities; if you buy the Turkish lira go small.
The idea of some of the currencies, ex the big boys, being in their own world, becoming more globally relevant and going up against the dollar is a theme I've been writing about for a while. Given the visibility for US equity returns to continue to be below normal for a while (another theme I've maybe worn out) maybe some folks should pursue this route?
Many of these countries have fewer moving parts, just one or two big industries, a drive for prosperity and the visibility for that prosperity. So, everyone in the pool?
Back in the real world probably not for reasons that include access to product, having the experience how to choose many different destinations so as to be diversified, how to know when to come out of one destination and some others.
But the reasons listed above as to why you should not go all in does not argue against modest exposure. Putting 5% of your bond portfolio into sovereign debt from Chile, another 5% into the New Zealand currency ETF and 5% into something that replicates the Kazakhstan tenge and the rest into more plain vanilla is not the single worst thing you could do.
Another bit of evolution in this space is that on the heels of the CBOE creating the Oil Volatility Index (OVX), so an oil VIX, the CBOE will soon have volatility indexes on other commodities and currencies. These won't be easy to figure and may never be usable for most folks but this sort of innovation opens many possibilities for all manner of investors.
The picture is the Ahwahnee Hotel.
4 comments:
I was poking around TEI the other day and nearly fell off my chair. According to etfconnect, their largest holding is in sovereign debt from Iraq. Maybe if the war winds down and the economy reenergizes...but, wow.
I am beginning to wonder if the dollar has seen its low. We still have lots of financial issues to deal with, but it looks like decoupling will look sillier ans sillier soon as the rest of the world starts to have problems.
On a relative basis the US could be close to a low. Everyone is so negative on the dollar.
The pegged currencies are the problem as they should have adjusted a long time ago. That could lead to a final washout.
In the vacuum of a taxless society, maybe this makes sense. I have never been able to demonstrate that the after tax results of this kind of diversification is superior than a plain vanilla collection of low cost equity index funds rebalanced in such a way as to incur only long term cap gains. How do those with a small amount of tax-advantaged accounts do it?
Dollar bottom? I think it is unlikely where the biggies are concerned but maybe so. and if it is so then that is what this post is about; think about where the opportunities lie.
anon 7:04, the entire history of this site is about not using PV index funds. many of the several thousand posts since Sept 2004 have explored adding value with sector decisions, country decisions, volatility decisions and so on.
how does a small account do it? maybe where an account is too small it cannot be done but time available to spend researching is a big driver.
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