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ETF Specialist

Holding Cash Is No Way to Get Rich

Currency funds are good for hedging and short-term speculation, but not much else.

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Prospects for the U.S. dollar have weakened substantially in light of large budget and trade deficits compounded by the Fed's response to the financial crisis. The current quantitative easing programs employed by the Federal Reserve are tantamount to printing currency, which could further weaken the U.S. dollar. Over the past decade, the U.S. dollar has already declined by about 20% compared to a trade-weighted, broad basket of currencies. In response, investors have increasingly looked to foreign currencies. Let’s review the pros and cons of adding currency investments to your portfolio through an analysis of  Powershares DB US Dollar Index Bearish (UDN).

UDN tracks the performance of a basket of currencies against the U.S. dollar. It is important to remember that currencies are not a productive asset (unlike a factory), thus they offer very little return potential over the long run. For those betting on a general U.S. dollar depreciation, this fund provides a better tool than single-currency funds because it tracks the performance of six foreign currencies, namely the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc, against the U.S. dollar. It does not include the currencies of faster-growing emerging markets and is heavily weighted toward the euro.

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.