Morningstar's Anti Dollar ETF Portfolio

Maybe the people at Morningstar are starting to listen to me and trying to offer some actual insightful ETF content (I am quite certain I don't actually show up on their radar) as they offered up something they called the Dollar Proof ETF Portfolio. The portfolio contained ten ETFs covering equities, bonds, commodities and currency.

The Dollar Proof Portfolio gets off to a peculiar start with a 20% weighting to the Vanguard Total Stock Market (VTI) which is a domestic large cap fund. In terms of constructing a diversified portfolio using broad based funds then VTI makes sense but where dollar-proofing is the goal the logic is lost on me. Someone might say that the multinationals in the fund do business overseas and offer some insulation. A multinational might benefit from a weak dollar but it is not a proxy for foreign anything. To repeat from I don't know how many past posts; beneficiary of is not the same thing as proxy for.

The Dollar Proof Portfolio also has large weightings in Vanguard FTSE All World ex-US VEU, Vanguard FTSE All World ex-US Small Cap (VSS), SPDR Barclays Intl Inflation Protected (WIP), SPDR Barclays Intl Treasury Bond (BWX) and PowerShares Dollar Down ETF (UDN) totaling 59% of the portfolio.

The issue with these funds is that they all have big exposure to the euro; in order listed above 31%, 25%, 27%, 37% and 57%. There are also liberal doses to the UK and Japan. The issue with the euro is that for all the reasons listed in the Morningstar article, the euro is up a very similar creek as the greenback so a portfolio that bets heavily on the euro is hoping that as bad as the dollar might be the euro is not quite as bad. Between the dollar and the euro I am not sure which one is worse and I am certainly not willing to bet client money that the euro will win the ugly contest. I think this point is crucial and thus invalidates the portfolio even if the commentary to support it makes some good points.

Also included in the portfolio are small exposures to gold which I agree with, a position in the new WisdomTree Emerging Market Local Debt Fund (ELD) which I also agree with and the iShares DJ US Oil & Gas Exploration & Production ETF (IEO) which in a way makes sense but in a way not. A weak dollar helps energy companies but I would think it would make more sense to own foreign energy companies than domestic ones and IEO is a domestic fund.

In thinking about a better way to go about this I would suggest going much narrower with the equity exposure such that the euro is either minimized or avoided altogether. While I think individual stocks should be included here, funds covering countries in Latin America (there is one regional fund from iShares and another on the way from GlobalX), the Scandies, Antipodes, Asia although I would avoid Japan and China funds that are heavy in financials, Israel, Canada and although we are not in there now I would add Africa in a small dose to this list.

Another way to access this idea that I did not see mentioned in the original post could be via one of the currencies pegged to the US dollar. The idea here is that a debasement in the US dollar makes a peg more difficult to maintain. This has been evident, for example, with a hot inflation rate in Hong Kong along with real estate appreciation.

The idea behind the Dollar Proof Portfolio is sound but the way they go about it relies on instruments that are simply too blunt. The idea is sophisticated but most of the funds suggested are not. ETFs offer all sorts of access and specialization to implement many sophisticated ideas. If you want to build a portfolio around a very specific idea it only makes sense put as much thought into how to implement toward the concept as you do coming up with the concept.

Some clients own BWX and WIP.