I have mentioned the Profunds currency funds a couple of times before. There are two, one is a play on a rising US dollar (RDPIX) and the other is a play on a falling US dollar (FDPIX). I believe these are the first OEFs that are a pure play on the state of the dollar. The concept is very intriguing to me for a potential counter strategy.
I have written a little bit about my personal holdings in the past. My approach is to have a very boring, low beta, high yielding portfolio that is very overweight foreign stocks, more so than my clients. The idea is that worrying about my own account takes almost no time away from the work I do for clients. My entire financial life is wrapped up in the stock market, taking on a higher risk profile seems like it would be counter productive to my job.
I use inverse index funds for some clients as a counter strategy. But these are only available (as far as I know) for US indices. This probably would not be helpful for a heavy weighting in foreign but one of the currency funds might be.
The dollar index ($USD) looks to have a low correlation to the iShares EAFE (EFA) which is probably a good enough proxy for foreign stocks for this article. There is a zig and zag effect between the dollar and foreign stocks. So a possible hedge to foreign stocks might be to buy RDPIX.
While I like the concept I don't like the trade just yet. More specifically I don't think I could own enough RDPIX to hedge enough of my portfolio. If I bought 5% in RDPIX and the dollar moved 3%, how much help would this really be? Probably not enough.
I imagine we will soon see currency OEFs that use leverage, along the lines of the Pro Funds Ultras. That is to say these OEF would provide double, or more, of the effect of the dollar index. This would make for a more volatile single holding but a more effective tool for a portfolio.
Interesting stuff, no?
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
2 comments:
Thanks for the info on the USD-derived ProFunds, I'll keep them in mind. Any thoughts on RRPIX (rising rates, 30 year), and it's ever-dropping value? I might just bet on rising 10-year or 30-year rates. Ideas?
These two new vehicles do seem to offer a lot of promise.
Obe advantage that I see is that the funds would offer the private investor without forex trading account, a simple way to hedge his or her foreign currency exposure to some extent. Using these funds may be helpful even those with an fx trading account as they avoid the convolutions that are likely to occur if that fx account is not at the same firm as the stock investing /trading account.
The biggest drawbacks I see are:
a) they are not much direct help in hedging Emerging Markets investments - given that the weightings in the USDX are so skewed toward the Euro, Yen, and Sterling (combined, about 83% of the USDX);
http://www.profunds.com/usermedia/pdf/currencybro.pdf [page 5]
b) they "look" expensive funds, for passive index-tracking funds, with estimated expenses of 1.6%, or 2.6% if we are talking about the Adviser-sold version with its 1% 12b-1 fee.
http://www.profunds.com/usermedia/pdf/prospectus.pdf [page 71]
These expenses estimates are probably conservative, as the funds are brand new, expenses should come down a bit as the funds grow. The Management Fee is still quite steep (I think) at 75bps.
You make a fair point about the amount you'd have to tie-up in the funds to make any real difference to hedging the foreign part of a portfolio. It is late as I write this, and I am not that swift anyway, but maybe clients with the capacity for it could leverage their EFAs (margin them) and release some money for the hedge??
The funds' biggest attraction to me is for those NOT seeking alpha - just wanting a play on the US dollar, without the complications of company and market related risks inherent in foreign stocks. They certainly offer those clients a much lower dollar-amount threshold to get involved than would, say, a short-dated Euro bond.
Post a Comment