There's near unanimity that the dramatic efforts by the U.S. government are responsible for significant deterioration in the value and credibility of the U.S. dollar. (Review the reasons that a weak dollar has had advantages as well as disadvantages.) Yet one thing that any investor must consider going forward are ways to hedge against inflationary pressures that stem directly from less valuable dollars in circulation.
The most common guidance has been lower risk, inflation-protected securities. Yet the ever-popular iShares TIPS Bond (TIP) relies on the Consumer Price Index (CPI) that always seems to underestimate inflation in the real world. For that reason alone, TIP may have trouble keeping up with actual inflation... and thereby struggle to maintain true purchasing power.
Foreign stocks, particularly emerging market stocks, may be a more potent fighter against the erosion of purchasing power. In fact, the total return that emanates from share price appreciation, dividend yield and foreign currency gains can add generously to a portfolio.
There is one catch, however. For all the talk about decoupling, the worldwide linkages in financial markets have demonstrated that U.S. stocks probably wouldn't collapse in a vacuum; that is, we'd likely see significant foreign stock declines as well.
So when it comes to reasonable-risk returns to overcome inflation/dollar devaluation, one should not ignore precious metals. Even with gold at $1000+ an ounce... even with remarkable gains for silver, platinum and the precious metal combo funds... there's still plenty of reason to claim a stake.
For starters, the risk of owning gold has frequently been overstated; financial planners, pension committees and wannabes often declare that gold is far too risky for clients/beneficiaries.
However, gold has closed higher every year in the 21st century. Its worst drawdown of -30% in 2008's all-asset liquidation is still less than any country's stock benchmark's worst drawdown. And the SPDR Gold Trust (GLD) currently carries a Risk Grade of 76... less than the S&P 500's SPY grade of 83.
I hardly consider myself a gold bug; that said, I'll probably be bullish on the yellow metal until one or two things occur. One, if my fellow countrymen start panning for gold in their local streams or mining in their backyards, that'd be bearish. (Note: Consider how backyard drilling started hitting headlines when oil hit $150.) Second, if gold falls below a 200-day moving average, I'd be quite cognizant of the metal's historical downside (drawdown).
Here are 5 ways to invest in the potential success of precious metal ETFs, sorted by risk:
5 ETFs For Precious Metal Investors
YTD % (through 10/23)
SPDR Gold Trust (GLD)
PowerShares DP Precious Metals (DBP)
iShares Silver Trust (SLV)
ProShares Ultra Gold (UGL)
Market Vectors Gold Miners (GDX)
Even though precious metals can go a long way towards protecting against inflation... and even though foreign stocks could decline substantially if the world completely lost faith in the current world currency... foreign equity exposure remains one of the premier ways to ward off the inflationary pressures of too many dollars in circulation. Naturally, the new Claymore Alphashares China All-Cap (YAO) captured my attention for this very reason.
In reviewing, All-Cap YAO, however, I became moderately concerned by the 35% weighting in financial stocks. (Note: The next biggest participants include Energy and Technology at 18% and 11.5% respectively)
It's not unusual for single-country ETFs outside of the U.S. to have large weightings in Financials; in particular, those companies are the largest market cap leaders and they're the most visible.
However, some analysts believe that there is a huge real estate bubble in China; perhaps properties are wildly overvalued. Expectations for a 50% drop in China real estate are not uncommon from some writers.
Are we to believe that U.S. financial companies are the only ones who would put forward unsound loans in the name of corporate skullduggery? Is it possible that financial institutions around the world may also be prone to scandal or malfeasance? Or, even everything is on the up-n-up in China corporate finance, wouldn't a real estate drop of 50% in China go a long way towards crushing financial stock performance?
I don't know the answers. But I do know, it's worth considering the risks. Here, then, are the most common China ETFs with respective exposure to the financial sector:
China ETFs and Exposure to the Financial Sector
PowerShares Golden Dragon Halter China (PGJ)
Claymore China Small Cap (HAO)
FirstTrust Chindia (FNI)
Morgan Stanley China (CAF)
SPDR S&P China ETF (GXC)
Claymore China All-Cap (YAO)
iShares FTSE China Hong Kong Listed (FCHI)
iShares FTSE China 25 Index (FXI)
It's not that financial segment participation should be avoided at all costs... on the contrary! In other parts of the world, insurance, banking and investment are heavy growth industries. That said, more than 20% in any particular segment is often worth keeping an extra tab on.
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.
Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.