Protect Your Portfolio from Currency Devaluation
June 7, 2009 by MJP
Filed under Investing for Retirement
Many experts believe that the U.S. economy is about to experience a severe bout of inflation. Others are actually expecting deflation. The deflation predictors don’t think that an increase in the money supply will be inflationary this time because our extreme debt will control our economy.
I don’t know who is right on the inflation fight. But just in case, we have a meaningful allocation of our retirement portfolio in a TIPS fund (VIPSX). Some investors call this a real return fund. We also own I-Bonds.
One way is to invest in a foreign bond mutual fund or ETF. The fund must be unhedged. If the fund is hedged, it diminishes or entirely removes the ability to exploit appreciation of the foreign currency with respect to the dollar.
There are two unhedged foreign bond funds that I am aware of. The PIMCO Foreign Bond Fund (PFUIX) and the SPDR Lehman International Treasury Bond ETF (BWX). We own BWX because I prefer the flexibility of an exchange traded fund.
More recently, I came across a fund (actually an exchange traded note or ETN) that provides inflation protection and currency protection at the same time. The fund is the SPDR DB International Government Inflation-Protected Bond ETF (WIP). This investment is comprised of different inflation-indexed bonds issued by foreign governments. These include the U.K., France, Sweden, and Brazil. WIP yields 2.3% with an expense ratio of 0.5%.
Of course, the hard core currency investors can engage in currency pair trading on the FOREX. That is too much work and too much risk for me.
I am curious if any of you have any thoughts or suggestions on the subject of protecting our retirement against devaluation of the dollar?
Photo credit: Silversprite
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WIP is an ETF, not an ETN.
International equities have unhedged currency exposure.
Commodities and hard assets hedge against dollar devaluation.
Currency ETFs also work though have zero expected economic return.
Here is what I did:
Go to my bank, purchase Swiss Francs, put them in my safe deposit box. OK, so they are not going to make interest sitting in there, but if you stop to think about it, its a pretty good protection from a number of risks, including devaluation of the dollar.