For those mutual fund investors who believe that the US dollar will lose ground against other currencies, how can you obtain an advantage? There is certainly more than one answer to this question. Let’s look at how a mutual fund investor can gain from a depreciating US dollar by investing in international mutual funds.
International Mutual Funds and a Depreciating US Dollar
International mutual funds are one of the best ways for mutual fund investors to play a depreciating US dollar. Individuals can invest in international funds with as little as $100, own hundreds of foreign stocks/bonds, and potentially gain from a depreciating US dollar.
International Equity Funds and the Depreciating US Dollar
Many international equity funds do not hedge foreign currency risk. This means that when mutual funds buy stocks on a foreign exchange, they pay for the stock in the foreign currency and do not buy or sell corresponding currency contracts (or any derivative designed to offset foreign currency exposure).
Since the returns of a US-based, international mutual fund are calculated in US dollars, these unhedged (to currency) international equity funds reap the benefit of both the return of the stock and the appreciation of the foreign currency. Of course, the opposite also holds true. If the combination of the stock returns and the foreign currency returns are negative, then the mutual fund investor has, obviously, not benefited.
International Bond Mutual Funds and the Depreciating US Dollar
Similar to international equity mutual funds, investors can take advantage of a depreciating US dollar by purchasing an unhedged international bond mutual fund. All else being equal (bond yield and bond price), if you own a foreign bond and the US dollar loses ground to that foreign bond’s currency, you will gain/lose based on the foreign currency’s appreciation/depreciation.
Mutual Funds that Play a Depreciating US Dollar
How can you learn the hedging policy of various international mutual funds? For example, if the greenback depreciates, which international funds will benefit from their foreign currency exposure?
The first place to learn more about the hedging strategies of various international mutual funds is to review the funds’ prospectuses. If you are looking at a particular international mutual fund and want to understand the foreign currency exposure, you should also review the mutual fund’s Web site.
For instance, PIMCO’s Web site for the Foreign Bond Fund (US Dollar-Hedged), reads, “Tempers risk by investing primarily in investment-grade bonds and hedging at least 80% of its foreign currency exposure to protect against unfavorable currency fluctuations.”
Final Word on Gaining from a Depreciating US Dollar
While it’s not advisable to choose a fund based on when and by how much you think the US dollar will depreciate, it is wise to diversify your holdings to take advantage of various market scenarios -- including a depreciating US dollar.
A Primer on Profiting from the Falling Dollar is helpful in understanding just how a US investor can benefit from a depreciating US dollar.