I've pondered the simulateneous rise in gold, U.S. stocks, and U.S. treasury bond prices. I've wondered how 3 very different asset classes could move in the same direction for 3+ months... and do so as the U.S. dollar drops to new depths day after day.

And I've finally come to a conclusion: This is the return of a carry trade.

No, it's not the infamous yen carry trade, where investors borrowed the Japanese dollar at negligible interest rates to invest in the higher-yielding Australian and New Zealand dollars. This is the U.S. dollar carry trade... and it may be far more dangerous.

In the yen carry trade, you had a stable currency (yen) that yielded nothing and was easy to borrow. You borrowed from one stable G-10 currency and invested in a higher-yielding G-10 currency to capture the income difference... pretty simple; that is, things were going along smoothly until an international credit crisis caused the yen's rapid appreciation such that investors scrambled to pay back the loans.

Today, however, the U.S. dollar is both cheap, easy to borrow, and counted on to fall in value. It's replaced the yen as a preferred funding source to buy the reasonably stable Australian dollar and/or New Zealand dollar. Not only do you get the income difference, but you're getting the appreciation of the Aussie dollar versus the U.S. dollar. It's a double win! (At least that's the perception!)

And therein lies the danger. Some investors around the world may ratchet up the risk by using leverage to make this investment.

Granted, the prospects for the Aussie dollar look good, as interest rates in Australia are likely to rise in the near future. And the prospects for the U.S. dollar look bad, as U.S. interest rates won't be rising in the foreseeable future.

Nevertheless, if the U.S. dollar were to suddenly come back into favor, due to any reason (e.g., risk aversion, government intervention, policy change, etc.), investors could rapidly sell off the stocks, currencies and other assets they've been buying with borrowed greenbacks.

For now, though, the ETF winners of the U.S. dollar carry trade are:

1. Currency Shares Australia Dollar Trust (FXA)... 22% YTD.

2. WisdomTree New Zealand Dollar (BNZ)... 23% YTD.

3. PowerShares G-10 Currency Harvest Fund (DBV)... the only carry trade fund borrows the 3 lowest yielding currencies and invests in the 3 highest yielding currencies.

4. iShares MSCI Australia Fund (EWA)... the rapid fire ascent of the Aussie dollar is giving an even bigger boost to foreign stocks, as Australian companies earn profits in ever-appreciating Aussie dollars.

5. iShares MSCI All-World Index (ACWI). The entire stock asset class is benefiting from folks borrowing the cheap U.S. dollar around the world and putting that money to work. For now!

REIT ETFs have also been benefiting from the U.S. dollar carry trade. Investors are pouring money into these risky trusts, in spite of the reality that REITs have extraordinary debts coming due.

At best, if credit remains loose enough for these business entities, they may be able to borrow their way out of disaster. If credit tightens, REITs may get beaten up yet again.

Yet some suggest there's a way out of the commercial property smack-down. Some private real-estate developers could go public, avoid bankruptcy, and use the increase in their asset price to get through the commercial property uncertainty. Meanwhile, improving credit may allow hotel operators to refinance debt and/or issue additional shares... though hotel/leisure represent only a small part of any current REIT ETFs.

Nevertheless, U.S. REIT ETFs seem a highly speculative choice for most portfolios. Why do I say that? Because they need so many things to go right when it is equally probable that a few key things may go wrong! After all, is the performance of U.S.-based REIT ETFs in 2009 that impressive relative to alternatives?

Do U.S. REITs Really Have the Right Stuff?




iShares DJ US Real Estate (IYR)



Vanguard REIT (ETF)




S&P 500 SPDR Trust (SPY)



SPDR Financial Select (XLF)




iShares FTSE/NAREIT Global exclude US (IFGL)


iShares FTSE/NAREIT Europe (IFEU)






It seems to me that foreign real estate companies are in the driver's seat and their investors are rewarded in two ways. First, they're getting a hedge against the U.S. dollar's weakness as foreign real estate companies earn profits in foreign currencies. And second, foreign real estate investment trusts may not have to minimize existing shareholders by issuing more stock to pay off ongoing debts.

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.  

You can view Gary's daily market commentary at www.ETFexpert.com.  You can also email him directly at garygordon@mypacificpark.com