Retail investors would do well to avoid this trade: Betting against the U.S. dollar using one of the currency funds or ETFs that have sprung up to take advantage of our flaccid greenback.
No, it's not because the dollar is strong or even appears to have much upside anytime soon. As we have said before, as long as the Federal Reserve continues to print money through a zero-interest-rate policy, the U.S. keeps running a big trade deficit and other nations move their foreign-exchange reserves out of dollars, the buck has no place to go but down.
But that doesn't mean investors should go chasing returns. That's a fine strategy if you're a Big Swinging, uh, Jerk on Goldman Sachs's (GS) trading desk, but it's one of the cardinal sins of investing for regular folks. The idea, recall, is to buy low. As Morningstar analyst David Kathman wrote Tuesday, just because funds and ETFs that benefit from from a falling dollar are doing well, it's pretty clear the easy money has been made.
"You might look at such returns and be tempted to think that these funds would make good investments," Kathman said. "But that kind of thinking is potentially dangerous, because it assumes that recent results will continue indefinitely. (They never do.)"
Chasing returns is usually a bad idea in any case, Kathman added, "but currency movements are especially volatile and highly unpredictable, often defying macroeconomic factors and the predictions of experts." Sure, it's possible that you could get good short-term returns if you bought a falling-dollar fund right now, but you could easily get burned, he says.
Unfortunately, it's never been easier for retail investors to play the currency game. Just five years ago, only one fund was luring them with the siren song of a burning buck, the Franklin Templeton Hard Currency fund (ICPHX). Cut to today and at least a dozen currency mutual funds and ETFs are playing everything from the U.S. dollar to the Russian ruble to the Brazilian real.
But just because you can make a bet on something doesn't mean that you should. And, as ever, it's important for regular folks to stick to their investment horizons. The dollar may be off 15 percent since March, but that doesn't mean it won't find a floor -- or come crawling back sooner than anyone thinks. For one thing, the weak dollar is killing America's trading partners. As DailyFinance's Eric Wahlgren wrote Tuesday, the Europeans have woken up to that fact that a weak dollar/strong euro is hurting their exports. And they're screaming for relief.
Then there's the case that as much as China and Russia are rattling their sabers about creating an alternative reserve currency to the dollar, it's much easier said than done. More than 50 percent of the world's debt is denominated in bucks. Good luck unwinding all those positions anytime soon.
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