A weaker U.S. dollar and fears of inflation have been beneficial to various exchange traded funds (ETFs).
According to John Spence for The Wall Street Journal, industrywide, ETF assets have topped $750 billion with year-to-date inflows of nearly $56.3 billion. A large portion of those assets are heading toward ETFs that track the international markets, bonds and commodities. All three classes offer protection from either inflation, a falling dollar or both. (For more stories on commodities ETFs, visit our commodity ETF category.)
Emerging Markets. Emerging markets are the talk of the town. One of the benefits of investing in emerging markets, aside from diversification, is the “dollar kicker” when assets denominated in foreign currencies are converted back to U.S. dollars. Investors get the benefit of differences between two currencies. (Watch Tom on CNBC to learn more about investing overseas).
One of the top selling international ETFs is the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) which has nearly $37 billion in assets and is up 65.4 % year-to-date.
Also consider more narrowly focused emerging market ETFs, too, especially if your risk tolerance is higher. Our Ultimate Guide to the BRIC ETFs outlines the options available to investors when it comes to Brazil, Russia, India and China, and more ideas can be found in our emerging markets category.
Bond ETFs. In the bond arena, the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) has been popular because it offers investors protection against inflation. The ETF has $16.9 billion in assets and is up 8.6% year-to-date. (All of your TIPS questions are answered here).
PIMCO also has some newly launched TIPS funds: PIMCO 15+ Yr. US TIPS Index Fund (NYSEArca:LTPZ) and PIMCO Broad US TIPS Index Fund (NYSEArca: TIPZ). (Three ways TIPS help hedge inflation).
Commodities. As for commodities ETFs, many have been drawing assets and attention. The SPDR Gold Shares (NYSEArca: GLD) boasts $37.5 billion in assets and is up 19.5% year-to-date. Commodities ETFs have really felt the heat this year as the Commodity Futures Trading Commission (CFTC) has stepped up regulation and is expected to impose position limits on certain ETFs soon. (Is the gold rally overheated?)
As with global ETFs, there are commodity ETFs that go from broad to narrow. Learn how to pick your spots here.
The Dollar’s Short Side. PowerShares offers two ETFs that seek to reflect the performance of the U.S. dollar long or short. As the dollar heads lower, investors might find the PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN) appealing. It’s up 8.3% year-to-date.
Dollar hedging can also be done with ETFs that track other currencies. Our currency special report has a list of the available ones out there, as well as explanations of how they operate.
As with any sector or asset class, always have a plan in place for both entry and exit. No trend goes on indefinitely, so by having a strategy and being prepared to act when necessary, you can give yourself the opportunity to be in for a potential long-term uptrend and out in time to protect yourself on the downside. (How to follow trends).
Kevin Grewal contributed to this article.