Investors looking to protect themselves from the falling value of the dollar and weakening US economy are discovering a variety of ways to invest their funds.

The common denominator to their investment strategies center around exchange traded funds (ETFs), which are baskets of stocks designed to track various indices, which investors can trade like stocks.

Specifically, instead of trading directly in the global currency markets by buying and selling currencies, many small investors are buying shares in gold and currency ETFs as a means of hedging their bets against the dollar.

However, one method that is even more straightforward is investing in foreign equity ETFs. Investing in these foreign equity ETFs not only protects investors from the falling value of the dollar, but also serve as a hedge against a weakening US economy.

Examples of ETFs that provide exposure to foreign equities include those offered by Vanguard and Barclays Global Investors. Vanguard provides ETFs that cover the European, Pacific, and emerging markets. Barclays Global Investors on the other hand, which is the largest ETF provider in the US, offers more that 30 foreign ETFs.

In addition investment houses such as Rydex and Powershares have specifically created ETFs, which enable investors to make leveraged bets on currencies.

Rydex for instance has on offer eight CurrencyShares, which comprise a set of foreign ETFs that track the price of eight currencies. The way this works is that each ETF tracks one currency. The eight currencies tracked by these Rydex ETFs are the Japanese yen, the British Pound, the Australian dollar, the Canadian dollar, the Mexican peso, the Swedish Krona, and the Swiss franc. When an investor buys shares in one of these ETFs, the value of the shares rise or fall with the currency relative to its value with the dollar.

Powershares on the other hand, has created both a bullish and bearish US dollar exchange traded fund. This fund is linked to Deutsche Bank’s long and short US dollar indices. These Deutsche Bank dollar indices are rules-based and made up of long and short futures contracts.

It is also worth pointing out that there is a lot interest in investing in gold ETFs as a means of hedging against the dollar. State Street for example, offers a gold ETF, the streetTracks Gold Shares which currently has a value of $165bn. This ETF marketed by State Street is 0.45 correlated to the dollar. This means that it has a fairly strong tendency to rise as the dollar falls in value. It must be noted that this is a tendency and that it is not certain that shares in this ETF will always mimic this pattern. In addition, streetTracks Gold shares also represent one-tenth the value of what an ounce of gold bullion costs.

Source:
Financial Times, December 15, 2007. A refuge from dollar’s decline by Rebecca Knight.