Despite rumors to the contrary, the U.S. dollar is still king. But, there are roughly 170 other national currencies around the world. Just as you don’t want to put your entire nest egg into one stock, it’s best not to have everything in just one currency, even a solid one. There are a number of ways to diversify. The most obvious is to sink some savings into one or more of numerous currency funds available to U.S. investors. These, like currencies themselves, come in various shapes and forms. The choices include exchange-traded funds (ETFs), exchange-traded notes (ETNs), and mutual funds. Fund providers include iPath, ProShares, PowerShares, PIMCO, CurrencyShares, and WisdomTree. Some funds allow you to plunk money into single, popular world currencies, such as the British pound, the Swiss franc, or the Japanese yen. Others offer more exotic fare, such as the Brazilian real, the Indian rupee, or the Chinese yuan. Still others allow you to mix and match foreign currencies.
U.S. investors have allocated more than $17 billion to such funds, and the figure has grown swiftly recently with rising concerns over U.S. government debt, and the threat of inflation—not to mention some rather aggressive advertising by currency-fund providers.
To date, this hasn’t been a good bet. Annualized figures from Morningstar show currency funds earning less than 1 percent for the past year, three years, and five years, and a lackluster 4 percent total over the past decade. As for the future, Morningstar fund analyst Michael Rawson doesn’t see enormous promise for currency funds. “Currencies are nothing more than (foreign) cash,” says Rawson. “And cash does not earn much return over the long run.”
So, why do it? In theory, the big score would come if you happened to buy a currency that jumped vis-à-vis the dollar. But that’s a big if. “I would say that currency shifts are more difficult to predict than stock performance,” says Charles Freeman, portfolio manager with Holderness Investments Company of Greensboro, North Carolina.
Another note of caution, fees for currency funds are high. Management fees, which eat away at principal, average 1.13 percent for currency funds. Fortunately, there’s a better way: adding some foreign stocks and bonds to your portfolio mix. “When you invest in Toyota stock,” says Freeman, “you are investing not only in a Japanese company, but in the Japanese yen.” By investing in foreign stock, you may see appreciation through dividends and capital growth, as well as positive currency effects.
If you don’t want to have to pick individual company stocks – a hard thing to do – you might complement your U.S. stock portfolio with a broad-based, foreign-stock index fund, giving you exposure to many companies around the world. The Vanguard Total International Stock ETF (ticker VXUS) is a good bet. For more conservative investing, you can buy foreign bond funds.
How much foreign exposure makes sense? Keeping roughly a quarter of your total portfolio abroad, in non-U.S. dollar investments, is a prudent move, says Rawson. He emphasizes that if a depreciating dollar (aka inflation) is a big concern, consider spreading your wealth into areas that traditionally do very well at matching or exceeding inflation. These areas include real estate—consider Vanguard REIT ETF (ticker VNQ); stocks of commodity-producing companies—consider SPDR S&P Global Natural Resources ETF (GNR); and U.S. Treasury inflation-protected securities—consider PIMCO 1–5 Year U.S. TIPS IndexETF (STPZ).
The dollar may still be king, but if the king is toppled, or merely takes a stumble, you want to be prepared.