6 Ways To Profit From The Falling Dollar

Quoted on
Fidelity.com (6.11.09)
6 Ways To Profit From The Falling Dollar
By Roger Fillion

The dollar is falling – but that doesn’t mean the sky is falling for U.S. investors.

After three years of steady declines, the dollar soared late last year as the deepening global financial crisis sent investors looking for the shelter of U.S. assets in the storm.

Now investors are leaving their safe haven, putting their money back into the stock market and other riskier investments. The result? The dollar has now given back nearly half of its 2008 gains. And there could be more declines coming.

But no need to be a chicken little about it. Indeed, investors can profit from the dollar’s misfortune, should it continue, as many investing professionals suggest it will.

An added plus: You’ll be protecting yourself against the inflation typically caused by a falling dollar, which makes it more expensive to buy imported goods and services.

“We’ve been telling people for about a year that our biggest concern is a loss of purchasing power from a weaker dollar and higher inflation,” says Ned Sundermann, president of Sundermann Capital Management, a fee-only investment advisory firm outside Denver.

But this doesn’t mean making a major overhaul in your investment portfolio.

“Currency predictions are difficult to make,” says Joanna Bewick, portfolio manager at Fidelity Investments, who stresses the importance of holding a well-diversified portfolio with dollar- and non-dollar-denominated investments. That way you can benefit if the dollar rises or falls.

Here are six ways you could benefit from a falling dollar and protect against inflation:

Buy overseas stock and bond mutual funds

“If you’ve got an inclination the dollar is going to drop over the long term, you should invest in foreign assets,” says Clint Edgington, president of Beacon Hill Investment Advisory, a fee-only investment advisory firm in Columbus, Ohio.

Foreign stock and bond funds are two such options. With a falling dollar, you’d capitalize on any appreciation in those investments and also get a currency gain from a falling dollar. Experts note you should check whether or not a fund is hedged against currency swings. One that isn’t hedged would give you the extra lift from the dollar drop plus gains in the stock or bond funds themselves. The risk is that you would lose from any dollar gain in an unhedged fund. It depends on your overall mix and tolerance for risk.

Buy shares or funds of big U.S. companies with significant overseas sales

Many American businesses traded on U.S. stock exchanges get a large percentage of their revenue selling recession-resistant products outside the United States. With the dollar weak or falling, their foreign-denominated overseas sales would be worth more once those sales are converted into dollars.

“Think of companies such as Coca-Cola, IBM, Microsoft and 3M,” says Fred Taylor, principal at North Star Investment Advisors, a fee-only investment advisory firm in Denver.

Buy commodities or commodity funds

“Move money into hard assets, particularly any that would hurt if you dropped it on your foot,” says Sundermann, the Colorado investment adviser.

Oil, gold, metals and other dollar-denominated commodities have rallied while the dollar has fallen.

“As the dollar falls, foreign buyers bid up the prices of those commodities because they’ve become cheaper,” Fidelity’s Bewick says. An easy way to invest: buy a mutual fund or an exchange-traded fund, an investment vehicle that trades on a stock exchange. The fund or ETF would track a commodity price index, or stocks of companies that produce commodities.

Buy overseas currencies

While perhaps too risky for most average investors, buying foreign currencies can let you profit directly from a falling dollar. You can buy them outright, but a simpler way is to invest in a currency mutual fund or an ETF linked to either a basket of overseas currencies or a single one, such as the euro or the Australian dollar.

The risks are substantial, though, because currency swings can be sudden and terribly sharp. Think Thai baht or Mexican peso and you’ll get the idea.

Buy ‘TIPS’ or funds that bet against U.S. Treasury bonds

“If the dollar is going to fall, interest rates are going to go up,” says Vitaliy Katsenelson, director of research at Investment Management Associates Inc., a fee-only money-management firm in Denver.

Treasury prices fall when inflation and interest rates rise as investors seek to free up money from long-term investments.

What to do? You can buy Treasury Inflation Protected Securities, or “TIPS,” which are designed to protect against inflation. Or buy a mutual fund that bets against the price of U.S. Treasury bonds. If Treasury prices fall, the value of your investment would go up.

Buy shares in a real estate investment trust

A REIT is a real estate company that sells shares of stock to the public. You can invest either directly or through a REIT mutual fund. REITs typically manage income-producing properties, such as apartment buildings or office buildings. A residential REIT is considered less complex.

“You’d expect the rental rate on the apartments to rise because of the general expectations about inflation,” says Clifford Smith, professor at the University of Rochester’s Simon Graduate School of Business.

Whether it’s REITs, TIPS, the euro, gold, IBM or an overseas stock mutual fund, you’ve got plenty of options — so to speak — to make a buck from a falling dollar.