David Gaffen at WSJ Marketbeat offered some contrarian thoughts from Chet Courrier about cash as an asset class and investing in money markets.
"…yet there also looks to be a contrarian message here. As in stocks or any other market, rising enthusiasm may send a warning signal that the best returns might soon be past."
This is a worthwhile idea to think about. Money market rates are attractive but, per the ideas spelled out in the bond market post from earlier today, may not go up too much more. In fact they may start to go down as soon as next year.
I do not like CDs but many people do. Six month, 12 month and 18 month CDs might be attractive as money market substitutes over the next few months. I am also a fan of the currency ETFs. I bought the Swedish krona personally and for some (but not all) clients and recently and I also bought the Aussie personally but not for clients.
I have been clear about my opinion that I think the currency ETFs will change the way investors manage the cash portion of their portfolios. From the start of this blog I was optimistic that ETFs and other investment products would open doors that were previously closed, in terms of being easy.
I have no doubt that some people will use the currency ETFs too aggressively and regret their trades but that goes with all products, I think.
Some portion of the cash allocation invested in foreign currency makes sense to me. I view this as a diversification tool more than anything else. If an investor targets a 10% cash allocation, putting 20% or so of that cash, so 2% of the overall portfolio, in to something foreign could be a good diversifier.
Wikinvest Wire
9 comments:
ROGER, PLS COMMENT FURTHER ON CURRENCY ETFS. IS THIS A PLAY ON THE DOLLAR? ARE THERE ANY OTHER BENEFITS? WITH A LITTLE MORE KNOWLEDGE I MAY MAKE AMATUER STATUS.
THANKS
You can click here for more from this blog about the currency ETFs.
Please re-comment if those posts don't answer your questions.
Just noticed that Seeking Alpha has a similiar comment to Random Roger's re: bonds and calculating principal loss when interest rates increase.
Would appreciate a discussion on the value of the Seeking Alpha site. They certainly seem prolific-and the price is right. Have any of the other readers of this blog profited or lost on a consistent basis from this source? Thanks.
not to be a jerk but you do realize that the bond article on Seeking Alpha wasn't similar--it was my post.
Seeking Alpha has been re-running (with my permission) my content practically since day one of this blog. Anyone who really cares can check their archive for when the actually started re-running my stuff.
Roger,
Re currency allocation, is there a mutual fund(s) that are worth strong consideration that focus on currency as an allocation class? Why not let a professional mgr choose the country?Thx
great question about active management. I will post a full response tomorrow morning.
Roger,
I definitely like the idea of currency ETFs. I think FXE (which I own) is probably here to stay but the jury is still out on the newer ones (at least for me).
I read somewhere that the liquidity of any ETF is primarily determined by the liquidity of the components it represents more so than how many shares it trades daily. Makes sense to me. Do you agree?
The currency ETFs are also fairly expensive; not in terms of "valuation", but simply their actual price (if anyone was wondering, by the way, you are not required to buy them in 100 share lots). When comparing liquidity of different ETFs, does it also make sense to consider their respective prices? For example, 100k shares of FXE in a day would be equivalent to almost a million shares of the water ETF (PHO) in terms of dollar value traded.
I guess my main concern is in trying to figure out what spreads would be considered "reasonable" for the newer ETFs. FXE averages about 4 cents which seemed reasonable for a security that trades for over $125. But is 10-12 cents reasonable for FXC? The spread on the Swedish Krona ETF is very wide. Didn't stop you from buying apparently. Maybe it makes sense that it would be wider than FXE based on the fact that there are a lot more euros in the world than Swedish Krona. But how much wider is reasonable? I really have no frame of reference here.
Any thoughts?
Ron
I like CDs. I think of them as really, really short term bonds. My emergency cash is stashed in a laddered set of CDs.
Fred
I personally fail to see the attraction of the currency ETFs.
To me, it makes more sense to stick your cash in a savings account. One United Bank offers 5.25% on savings accounts right now.
Why take on the risk of currency fluctuations while earning less interest than investing in risk free assets?
If you absolutely must have FX exposure, (which IMHO is needless noisy risk) then something like the PIMCO unhedged foreign bond fund makes more sense and will pay better than the overnight savings accounts that the Currency ETF's invest in.
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