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ETF Specialist

Nobody Ever Got Rich Holding Cash

Currency ETFs have their uses, just not as long-term investments.

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In the past year, cash became a very appealing place to be. Believe us, we know--our own Hands-On tactical portfolio had nearly 60% of assets in cash through much of the crisis. However, as the economy bottoms out (as it seems to be doing) and risk appetites return, we have looked to get back into assets that can generate returns over the longer term, or at least save us from the potential ramifications of today's loose monetary policy. The quick stimulus spending and cheap cash churned out by the U.S. government and Federal Reserve seem to have helped avoid a Great Depression-style collapse, but it will be extremely difficult in the future for policymakers to steer between the Scylla and Charybdis of excessive tightening triggering a new recession and continued lax monetary policy generating rampant inflation. In this tricky investment environment, we have heard that a new class of ETF is being offered as the answer: currency funds.

The excitement began in earnest with this Wall Street Journal article about China wanting to diversify its reserves away from the U.S. dollar. Zhou Xiaochuan, the head of China's central bank, had given a speech that listed problems with the dollar as a dominant reserve currency and obliquely referenced an old idea of John Maynard Keynes for a global reserve currency called the "Bancor" backed by a diversified basket of commodities. As news came in April that China had been buying up copper, theories began to abound about China's plans for the stockpiled metal and potential moves toward backing its currency with commodities instead of U.S. dollars. By switching away from U.S. Treasury securities and toward commodities or other currencies as a reserve investment, China would simultaneously weaken the U.S. dollar and strengthen its own renminbi (also known as the yuan) over the long term. When we also consider China's strong economic growth, small deficits, and large net exports, the future of the renminbi looks bright. However, that does not mean it will make a good investment.

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Bradley Kay has a position in the following securities mentioned above: DGS. Find out about Morningstar’s editorial policies.