by Anthony Mirhaydari | March 11, 2014 6:00 am
This market has repeatedly resisted any and all efforts to sidetrack it. We haven’t had a meaningful pullback in the S&P 500 since late 2012. The Russell 2000 recently punched to new record highs with a near 3% gain — a move to record highs with an enthusiasm that hasn’t been seen since the height of the dot-com bubble.
The largely uninterrupted flow of cheap money stimulus by the major central banks has been the market’s primary driver. But the mechanism behind the action has been currency carry trades, where hedge-fund types have sold short the currencies of the most active central banks — mainly, the Federal Reserve and the Bank of Japan — and used the proceeds to buy risky assets like stocks, bonds, and commodities.
Throughout 2013, the most popular carry trade currency was the yen, which explained why the U.S. stock market closely tracked the value of the yen most days.
But 2014, on the other hand, looks like it could feature the rising popularity of the U.S. dollar as a carry trade currency, with policymakers at the Federal Reserve focused on keeping short-term interest rates near 0% for longer.
If so, investors will need to keep an eye on these three exchange-traded funds that should benefit from any consistent weakness in the greenback:
The iShares Silver Trust (SLV) provides exposure to physical silver bullion holdings, the amount of which fluctuates depending on the level of assets invested in the fund.
Like all the precious metals, silver is seen as a store of value and a hedge against higher inflation in case the Fed loses control of the price level. It’s more dynamic than gold, which means it should rise faster — providing built-in leverage — if the dollar drops as I expect.
The SLV has been in an epic downtrend since the 2011 inflation scare and precious metals peak, but looks ready for a turnaround.
Expenses for SLV run 0.5%, or $50 for every $10,000 invested.
Similar to the idea behind the SLV, Global X Silver Miners (SIL) ETF invests in a basket of silver mining stocks, including Silver Wheaton (SLW) and Pan American Silver (PAAS).
SIL holds 32 individual stock positions in the industry group concentrated in Canada. But there’s a key difference between investing in silver miners and investing in the metal itself.
Investors get the benefit of operational leverage when buying miners. Because of their high fixed-cost exposure, mining stocks tend to have some leverage to changes in the price of gold and silver. A rise in metal prices above their break even will quickly add to profitability. So buying miners comes with more risk … but also more reward.
Expenses for SIL run 0.65%.
Although I think emerging-market stocks will continue to underperform throughout 2014 — mainly due to the drag from China as it works through the comedown from its massive credit bubble — there will be pockets of strength encouraged by the dollar’s weakness. One such area is Brazil, which is particularly sensitive to currency fluctuations due to its reliance on foreign capital inflows.
The iShares MSCI Brazil Index (EWZ) provides exposure to that strength by holding a collection of Brazilian stocks equal to 85% of the available market capitalization in that country. The largest holding by allocation is Petrobras (PBR), the state-owned energy company benefiting from the discovery of vast offshore oil reserves.
Expenses for EWZ run 0.62%.
Disclosure: At the time of writing, Anthony had recommended SLV, SIL, and EWZ to his clients.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
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