Weak-Dollar Woes

How various fund options can help protect your portfolio

with Ameriprise Financial in Woodbridge, Connecticut. If the dollar is devalued further, then holding all your money in U.S. securities means you risk losing purchasing power.

With even more international allocation in their portfolio are Williams’ clients Linda and Jerry Guyden of Easton, Connecticut. “We have about two-thirds of our assets outside the U.S., and we might go even higher,” says Linda, 54, a former corporate executive now on sabbatical. “We’ve always felt the market is global, so that’s where you should invest. We believe there’s a good chance that the U.S. dollar will continue to fall, so concentrating in the U.S. may be even riskier now.”

Jerry, 55, a professor at City College of New York, cites corporate governance issues as contributors to their desire to de-emphasize U.S. investing. “After Enron, WorldCom, and a slew of others, we don’t have as much trust in U.S. companies as we once did.”

Emphasizing ETFs
Investors wishing to diversify from U.S. holdings have more options these days. “We’re gradually switching from mutual funds to exchange-traded funds (ETFs), says Allen Gillespie, principal of GNI Capital in Greenville, South Carolina, who manages the Generation Wave Growth fund (GWGFX)-which has boasted an average annualized return of 13.28% for the last five years. Compared with traditional mutual funds, ETFs often have lower costs; increased transparency; and what Gillespie calls “granularity,” the ability to make narrowly focused bets.

For example, Gillespie’s fund holds iShares MSCI EAFE (EFA) and iShares MSCI Emerging Markets Index (EEM), two ETFs that track broad indexes of foreign stocks. In addition, the fund holds WisdomTree Japan SmallCap Dividend (DFJ), which invests in small Japanese companies that pay dividends. “We think the yen is undervalued versus the dollar,” says Gillespie. “People will be doing more business in Asia and there will be more demand for the region’s currencies, including the yen, which may appreciate. We also believe this sector of the Japanese market looks cheap. With this ETF, we buy the currency and the stocks.”

Other ETFs permit you to buy the currency without the risk or potential reward of the underlying stocks. Rydex Investments, for example, offers eight CurrencyShares ETFs, permitting you to invest in euros, pounds, yen, Swiss francs, Mexican pesos, Swedish kronor, Canadian dollars, or Australian dollars. “Institutional investors have had these kinds of opportunities for years,” says Tim Meyer, ETF business manager at Rydex in Rockville, Maryland. “Now, individual investors have products they can use to reduce their exposure to the U.S. dollar.”

When you buy one of these ETFs, your money goes into an interest-bearing bank account, denominated in that currency. You’ll get the yield from that account, plus or minus the currency move. Suppose, for example, you invest in CurrencyShares Australian Dollar Trust (FXA), which, Meyer says, has a great appeal lately because of Australia’s commodity-based economy and expectations that it will benefit from its proximity to China as that economy continues to grow. As of early January, investors were earning 6.10%. If the Aussie dollar gains 10% versus the U.S. dollar this year,

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