Chartwell Asia ETF
Article Overview
Chartwell Asia zeros in on an under the radar screen investment theme and then lays out several creative options to capitalize on it.
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Thursday, May 25th, 2006
The ETF Currency Edge
After a year when higher American interest rates helped stem pressure on the U.S. Dollar, the currency is losing ground around the world. U.S. policy makers and investors are scrambling to cope with what may a long period of dollar weakness.
You don't have to go far to see evidence of the declining greenback - just look to Canada whose currency is at a twenty year high to the U.S. dollar. After bottoming out at 62 cents in 2002, the Canadian dollar known as the loonie has climbed to 90 cents and some predict parity.
It doesn't take an economist to understand this change of fortunes. While the U.S. is running enormous budget and trade deficits, Canada has recorded 10 straight years of balanced federal budgets, has one of the world's lowest national debts relative to GDP and, of course, is benefiting greatly from high commodity and energy prices.
The Canada iShare ETF (EWC) is up 47% over the last 12 months.
After showing some strength in 2005, the American dollar has also losing ground against the euro going from 0.79 euro to 0.82 euro during the last month
But it is in Asia that the American dollar faces its greatest challenge.
Pimco guro Bill Gross in his May Investment Outlook "As GM Goes, So Goes the Nation" advises investors to sell some U.S. assets and look at lower-cost, faster-growing countries in Asia that have higher savings and investment rates.
The finance ministers of Japan, China and South Korea issued a statement this week that announced "immediate launching of discussions on the road map for a system to coordinate foreign exchange policy" and the further study of a common currency unit.
While I am certainly not as fatalistic as Mr. Gross about the prospects for the American economy, since publishing in early 2003 The New Global Investor, I have called for investors to have an Asian tilt in their global portfolios.
Since ETFs are not hedged they are excellent investment tools to benefit not only from the appreciation of stocks held inside the ETF basket but also benefit from currency appreciation relative to the American dollar.
Here are a few examples. The Austria iShare (EWO) is up 57% over the past year, South Africa (EZA) is up 70%, Australia (EWA) is up 36%, Sweden (EWD) is up 39% and Singapore (EWS) is up 21%. Rydex has also introduced a Euro Currency Trust ETF (FXE) that would benefit from a stronger euro and has an annual fee of only 0.30%.
What does America needs to do to keep the dollar strong and maintain its premier status as a global reserve currency? First, show some fiscal discipline. President Bush should follow through on his veto threat if the $109 billion spending measure approved by the U.S. Senate this week passes the House. We have to start somewhere. The markets would also appreciate some sort of movement on entitlement reform because entitlements account for 79% of the national budget. In addition, nothing would help stir American innovation, growth and investment more than a flat tax.
A weaker American dollar directly translates into a lower standard of living for Americans. A weaker dollar may be seen by some as a way to spur exports and economic growth but in the end will lead to ruin. Let's make the tough fiscal choices now and avoid relying on growth choking higher interest rates alone to defend the value of the dollar.
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