The vast majority of investors think that the U.S. dollar will continue its multi-year decline. Why else would the fund industry be launching so many new currency ETFs?
As long time MAXfunds.com readers know, we think most investors are usually wrong (this is the main reason why fund investors as a group underperform the market). For the last couple of years fund investors have been flooding into foreign funds for their S&P 500 beating returns. Most investors probably don't understand that much of foreign-fund's outperformance is a result of the dollar's fall. Most investors should read this Wall Street Journal Article:
Foreign stock funds soared over the past seven years, far outpacing the returns of U.S.-focused funds. A big driver of the gains was the dollar's decline against foreign currencies.
Now the tide may be turning. Many market pros -- even longtime dollar bears, such as celebrated investor George Soros -- are betting that the dollar is stabilizing and may even go up in the next 12 to 18 months. For small investors, a stronger dollar could mean that many of the gains they've enjoyed in recent years in their foreign-stock funds could be imperiled."
Most shocking of all to those giddy over the past performance of funds like Dodge & Cox International (DODFX) - a fund we recommend here when it was brand spankin' new and has been on our favorite funds list since 2002 - is this nugget:
The MSCI EAFE index, a leading benchmark of developing-country stocks, had an 8.8% annualized total return in U.S. dollar terms between Jan. 1, 2001, and Dec. 31, 2007. In local-currency terms, the return was merely 4.3%."
One option for dollar bulls going forward (besides increasing allocations to U.S. funds) is to focus on foreign funds that hedge currency exposure. While these funds can be expensive and can reduce the diversification benefit of investing globally, with the current down-and-out buck they are a reasonable solution in the short term.
The WSJ article details several funds that are hedging currency fluctuations. Surprisingly, some funds that never did so are now hedging (traditionally funds either hedge or don't). According to the article, Dodge & Cox International Stock (DODFX) is hedging for the first time since its launch.
Dollar Up, Foreign Funds Down
The vast majority of investors think that the U.S. dollar will continue its multi-year decline. Why else would the fund industry be launching so many new currency ETFs?
As long time MAXfunds.com readers know, we think most investors are usually wrong (this is the main reason why fund investors as a group underperform the market). For the last couple of years fund investors have been flooding into foreign funds for their S&P 500 beating returns. Most investors probably don't understand that much of foreign-fund's outperformance is a result of the dollar's fall. Most investors should read this Wall Street Journal Article:
Foreign stock funds soared over the past seven years, far outpacing the returns of U.S.-focused funds. A big driver of the gains was the dollar's decline against foreign currencies.
Now the tide may be turning. Many market pros -- even longtime dollar bears, such as celebrated investor George Soros -- are betting that the dollar is stabilizing and may even go up in the next 12 to 18 months. For small investors, a stronger dollar could mean that many of the gains they've enjoyed in recent years in their foreign-stock funds could be imperiled."
Most shocking of all to those giddy over the past performance of funds like Dodge & Cox International (DODFX) - a fund we recommend here when it was brand spankin' new and has been on our favorite funds list since 2002 - is this nugget:
The MSCI EAFE index, a leading benchmark of developing-country stocks, had an 8.8% annualized total return in U.S. dollar terms between Jan. 1, 2001, and Dec. 31, 2007. In local-currency terms, the return was merely 4.3%."
One option for dollar bulls going forward (besides increasing allocations to U.S. funds) is to focus on foreign funds that hedge currency exposure. While these funds can be expensive and can reduce the diversification benefit of investing globally, with the current down-and-out buck they are a reasonable solution in the short term.
The WSJ article details several funds that are hedging currency fluctuations. Surprisingly, some funds that never did so are now hedging (traditionally funds either hedge or don't). According to the article, Dodge & Cox International Stock (DODFX) is hedging for the first time since its launch.
Whos Hot on the Dollar, Whos Not
Mostly Hedging:
Tweedy, Browne Global Value (TBGVX)
Longleaf Internatinonal (LLINX)
Mutual Series European (TEMIX)
Not Much Hedging:
Vanguard Developed Markets Index (VDMIX)
Fidelity International Discover (FIGRX)
American Funds EuroPacific Growth (AEPGX)
Increasing Hedging:
Oakmark International (OAKIX)
Dodge & Cox International Stock (DODFX)
Henderson International Opportunites (HFOAX)
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