While the weak dollar can throw a monkey wrench into your international travel plans, it doesn't have to derail your portfolio. Here are four ideas for turning the dollar's decline into higher investment returns.
Multinationals. Michael Farr of investment manager Farr, Miller & Washington suggests investing in U.S.-based multinationals that derive a large portion of their business from abroad: "companies with broad international operations that will benefit from the exchange rate," Farr says. "If you are a domestic investor, own those multinationals." Farr points to companies like General Electric, Johnson & Johnson, Dell, and DuPont as examples. (Farr owns General Electric, Johnson & Johnson, and Dell, but he does not own DuPont.)
Commodity plays. With the dollar depreciating against other major currencies, it's also probably depreciating against commodities—creating an opportunity for investors, says David Dietze, chief investment strategist of Point View Financial Services. But rather than playing the commodities directly, Dietze suggests looking into commodity producers, like Chevron, ConocoPhillips, and Freeport-McMoRan Copper & Gold. "As the dollar depreciates, the commodities [such companies] produce go up; as the commodities go up, they garner more profit," Dietze says. "Ultimately, that should translate into a higher stock price."
Foreign funds. Gregg Wolper, a senior mutual fund analyst at Morningstar, suggests foreign stock funds for investors looking to get some exposure to the ongoing currency trends. Specifically, Wolper recommends the Julius Baer International Equity II fund, a foreign large-blend fund with exposure to Russia, Japan, and France, as well as other countries. "They are not afraid to go off the beaten track," Wolper says. "And they usually do not hedge their currency exposure, so you are getting mostly exposed to foreign currency." Wolper also recommends the Artisan International fund, which has a five-year annualized return of more than 21 percent.
Currency ETFs. Financial innovations have created new products that allow investors to bet on the direction of the U.S. dollar more easily. As the name suggests, the PowerShares DB US Dollar Bearish fund is an exchange-traded fund that enables investors to profit from a weakening dollar. Its counterpart, the US Dollar Bullish fund, works just the opposite way. "The main drawback of directly speculating on the dollar's direction is that it is very difficult to do correctly over the long term with consistency," Wolper says. "[The dollar] has fallen more or less consistently for many years now, and it seems like it is going to keep falling, but even the experts do get tripped up."
Despite its risks, if an investor is bent on betting directly on the dollar, these products are the smartest way to go, Wolper says. "If someone really does want to play the currency direction, it does make more sense to pick one of these direct plays rather than buy a stock fund where you've got all kinds of other [factors that influence] the return," he says.