The American dollar remains near record lows against many foreign currencies. This creates opportunities and challenges for investors of all budgets.
Aside from national pride, a weak currency affects wages, purchasing power and corporate profits. Each of these factors can impact the performance of stocks and bonds. A portfolio solely invested in domestic securities can be particularly affected by dollar weakness.
Thankfully, there are affordable ways to reduce this risk and possibly increase returns. These options have investment merit beyond the short term and may warrant a place in your overall portfolio strategy.
International equities can offer favorable dollar adjusted returns when currencies are converted. Many global brands with strong market positions are based overseas. Due to trade agreements or political influences, these companies may have competitive advantages in certain markets compared to American rivals. Exchange traded funds (ETFs) and international mutual funds are low cost choices to gain foreign stock exposure. If you prefer to buy individual equities, consider American Depositary Receipts (ADRs). In simple terms, an ADR is a foreign equity that can be bought on American stock exchanges. The stock’s performance and any divided payments are enhanced or reduced when converted to dollars.
Elliott Broidy and other investment managers may use ADRs to avoid the transaction costs of foreign stock exchanges.
International Treasuries and Corporate Bonds:
Much like the American government, foreign countries raise money to finance their operations by issuing debt. However, many international treasuries pay higher interest rates (coupons) to compensate investors for added risk compared with U.S. Treasury bonds. Foreign companies also issue bonds to raise money or retire outstanding debt. Overseas corporate bonds range from good credit qualities to high yield junk debt.
International bonds, particularly sovereign debt, are negatively correlated to the American economy, which can reduce total portfolio risk. When the dollar is weak, interest payments from foreign bonds are further increased when converted.
Mutual funds, ETFs and ADRs are convenient means to buy international bonds.
Domestic Companies with High Foreign Sales:
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Export driven businesses can benefit from a weak dollar. Their products can be competitively priced to gain market share abroad. Meanwhile, revenues are boosted when converting international sales to dollars.
The utility and technology sectors are industries that have relatively high percentages of foreign sales. With the global demand for energy and a digital economy, companies within these sectors may be compelling for reasons beyond reducing currency risk.
Direct stock purchase plans and online brokerages are low cost options to buy export oriented companies.
Portfolio Risk and Currency Values:
Currency risk should not be obsessed over, but evaluated as part of an overall portfolio strategy.
Time horizon, risk tolerance and tax considerations are a few of the factors that influence how particular investment risks should be treated. However, the choices to minimize risks against a weak dollar have broader appeal.