The value of the U.S. dollar can have a profound impact on investment markets. A weaker dollar can present both challenges and opportunities for investors. While it may erode purchasing power, it can also benefit certain asset classes. In this article, we’ll explore five funds that are well-positioned to make gains when the U.S. dollar is weak, and we’ll discuss the reasons behind their potential for strong performance.
- International Equity Funds
International equity funds, which invest in stocks from companies outside the United States, often thrive when the dollar is weak. A depreciating dollar can enhance the returns from international investments, particularly for U.S. investors. Companies in these funds may generate revenue in other currencies, and when those earnings are converted to a weaker U.S. dollar, they can significantly boost returns. Funds like the Vanguard Total International Stock Index Fund (VGTSX) offer diversified exposure to international equities.
- Precious Metals Funds
A weak dollar tends to drive up the prices of precious metals like gold and silver. Investors turn to these metals as a store of value during currency devaluation and economic uncertainty. Funds such as the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV) provide easy access to the price movements of these metals without the need for physical ownership.
- Commodity Funds
Commodities, including oil, agricultural products, and industrial metals, can also see price appreciation during a weak dollar environment. Commodity funds like the Invesco DB Commodity Index Tracking Fund (DBC) offer exposure to a diversified basket of commodities. As the dollar weakens, the real value of these hard assets tends to rise, making them appealing investments.
- Real Estate Investment Trust (REIT) Funds
Real estate investment trusts, or REITs, can benefit from a weak dollar as well. These funds invest in income-producing real estate, and as the dollar loses value, the rental income and property values of these assets often increase. The Vanguard Real Estate Index Fund (VGSLX) is an example of a fund that provides exposure to the real estate sector.
- Treasury Inflation-Protected Securities (TIPS) Funds
While many investments thrive in a weak dollar environment, some investors may seek to protect their purchasing power. TIPS funds, like the iShares TIPS Bond ETF (TIP), offer a solution. TIPS are U.S. Treasury bonds designed to adjust with inflation. When the dollar is weakening, these bonds can provide a hedge against rising prices.
Why These Funds Thrive on a Weak Dollar
The success of these funds during a weak dollar period is rooted in several factors:
- Currency Exchange Rates: International equity funds benefit from favorable currency exchange rates. When the U.S. dollar is weaker compared to other currencies, the returns from international investments increase when converted back to dollars.
- Safe-Haven Status: Precious metals like gold and silver are considered safe-haven assets. Investors flock to them during times of currency devaluation and economic instability, driving up their prices.
- Intrinsic Value: Commodities, by their nature, have intrinsic value. They are tangible assets with real-world applications. When the dollar weakens, the real value of commodities often rises, making them attractive investments.
- Real Asset Appreciation: REITs hold income-producing real estate assets. As the dollar weakens, rental income and property values tend to rise, contributing to the overall performance of REIT funds.
- Inflation Protection: TIPS bonds are indexed to inflation, which makes them an attractive option during a weak dollar period. As the dollar loses value, TIPS bonds adjust, providing investors with a reliable hedge against rising prices.
While a weak dollar may raise concerns about purchasing power, it also creates investment opportunities. These five funds—international equity funds, precious metals funds, commodity funds, REIT funds, and TIPS funds—are well-suited to benefit from a weak dollar environment. By diversifying your investment portfolio to include these funds, you can mitigate the impact of currency devaluation and potentially capitalize on the strengths of these asset classes, thus achieving strong performance even when the dollar is weak.