Three Ways You can Hedge against Fed's Follies

Sam Subramanian PhD, MBA

Uncle Sam responded to a 'once-in-a-generation' type of global economic crisis in 2008 with near-zero interest rates, rapid money supply expansion, and gargantuan fiscal stimulus.

Now comes the harder part of timing the orderly removal of these measures.

If the measures are withdrawn too soon, the recovery could be derailed and the economy can recede. If the measures are kept too long, the risks of inflation and asset bubbles increase.

Investors are increasingly betting that the Federal Reserve is likely to flounder. Even though current inflation data are not a cause for concern, gold has been on a tear rising nearly 38% since the start of 2009. Washington's measures have taken a toll on the U. S. dollar. The U. S. dollar index is down nearly 9% since the turn of the year.

So, what are the best ways to hedge against the possibility of the Fed erring?

Buy Gold: GLD and IAU

One obvious way is to invest in gold by buying shares of SPDR Gold (GLD) or iShares COMEX Gold Trust (IAU). Despite being right with my call for gold breaking through the $1,000 an ounce mark in 'Commodity Trading Strategies: Profiting from Gold and Natural Gas', I believe there are better ways to hedge against potential Federal Reserve follies.

Gold has risen strongly in recent trading sessions and the entry point is far from ideal. Furthermore, gold's upside potential can be limited if the U. S. economy cooperates and makes the Fed's job easier.

Better ways to hedge include investing in foreign bonds and selected foreign stocks. Unlike gold, these investments offer the possibility of paying off well even if the Fed gets its timing right in withdrawing measures used to fight the deep recession.

Buy Foreign Bond Funds and ETFs: LSGLX and BEGBX

Foreign bonds offer the benefits of providing foreign currency exposure, geographic diversification, current income, and potential for capital gains. Most individual investors are however not equipped to analyze individual foreign bonds. Foreign bond funds like Loomis Sayles Global Bond (LSGLX) and American Century International Bond (BEGBX) and ETFs like SPDR Barclays International Treasury Bond (BWX) and SPDR DB International Government Inflation-Protected Bond (WIP) are a good way to go here.

Foreign bond funds and ETFs are typically less volatile than gold and the current income they generate can come in handy in limiting damage if the Fed gets the timing right and the U. S. dollar rallies against foreign currencies.

Buy Selected Foreign Stocks Funds and ETFs: FICDX and EWA

You can profit from a decline in the U. S. dollar by investing a portion of your portfolio in well-managed, natural resource economies like Australia and Canada. Natural resources like oil and base metals are priced in U. S. dollars and often rise in price when the dollar declines. Natural resource producers can also benefit from the demand for raw materials needed to support growth in China and India.

iShares Australia ETF (EWA), iShares Canada ETF (EWC) and Fidelity Canada Fund (FICDX) are ETFs and mutual funds that focus on Australia and Canada. Such investments provide foreign country exposure and geographic diversification. They also offer the possibility of substantial capital gains from their indirect emerging market exposure.

So, think beyond gold as you seek ways to protect yourself from the Fed's policies. Foreign bonds and stocks in selected natural resource economies certainly merit consideration.

Popular How-To Guides Secrets to Boosting Your No Load Mutual Fund Returns Rollover IRA: A Booster Rocket for 401k Retirement Plans Best ETFs to Build Your ETF Portfolio Constructing a Top Mutual Fund Portfolio Selecting Stodgy Stocks to Grow Your Portfolio Diversified Portfolios with a Knock-Out Punch Select Sector SPDRs: Maximize Return and Minimize Risk A Guide to Analyzing Mutual Fund Returns Looking at Mutual Fund Fees the Right Way Inside Scoop on Morningstar Fiduciary Grades Are PowerShares ETFs Right for You? Custom Search

Recent MoneyMatters Articles MINDX: Matthews India Fund Review Fidelity Enters the Alternative Energy Fray with FSLEX Best Way to Invest in Energy Stocks Sector Funds: Best, Worst, and Mid-Year Market Outlook Choosing the Best Fidelity Money Market Funds JAOSX - A Worthy International Mutual Fund? 3 Good Stocks to Buy When Correction Ends Has the Dow Jones Industrial Average Topped? ETFs: Best, Worst, and 2010 Forecast Stock Market Predictions for 2010 Fidelity Select Funds: Best, Worst, 2010 Forecast More from Investing Blog Sign Up for Free e-letter

About AlphaProfit MoneyMatters and AlphaProfit
AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios with Fidelity funds and exchange-traded funds. It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won the coveted #1 rank from Hulbert Financial several times.

Copyright Policy and Fair Use Guide
You are welcome to quote a short excerpt of the article not exceeding 100 words with attribution in the form of a hyperlink to the article's full URL or http://www.alphaprofit.com. If you wish to republish the article in full on your website, blog, or other media, you must obtain permission.

AlphaProfit MoneyMatters™ is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual advice on investing. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind. AlphaProfit Investments, LLC is not responsible for any errors or omissions. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from any of the investment companies, brokers or entities connected with the securities mentioned herein. Please review our Terms and Conditions of Use and Subscriber Agreement which is available on our website at www.alphaprofit.com; they govern your relationship with AlphaProfit Investments, LLC, including, but not by way of limitation, use of the AlphaProfit MoneyMatters.

This page is best viewed in 1024 by 768 pixels screen resolution or higher.
Copyright © 2009 AlphaProfit Investments, LLC. All rights reserved.