Kris Walesby

In uncertain times such as the present, with asset prices and exchange rates fluctuating unpredictably, many investors are looking to make sure their portfolios are well-diversified, and to shore-up the defensive areas of their portfolios; while also looking to hedge risk in other parts of the portfolio – and even to take advantage of trading opportunities that present themselves.

Most of the time, investors intending any of these actions are concentrating on equities, says Kris Walesby, CEO ETF Securities.

“But the same attention should be paid to all areas of the portfolio – even the cash weighting,” says Walesby.

“Many investors view cash as simply a defensive and static portion of their portfolios. Typically, cash holdings are used for liquidity and downside protection, with Australian investors mostly using the Australian dollar.”

For most Australian investors holding at least 70%–80% of their assets in Australian dollar, adding exposure to currency fluctuation helps to diversify an Australian portfolio.

“The US dollar has traditionally been viewed as a safe-haven asset, with most global central banks keeping it as a reserve currency and many international transactions conducted in the US dollar. The value of the US dollar tends to be less volatile, particularly compared to emerging markets, backed by what is to the most part seen as political and economic stability.

“The diversification benefit comes from the fact that the US$/A$ exchange rate correlates negatively with the US sharemarket (as represented by the S&P 500 Index), meaning that the US dollar tends to appreciate against the Australian dollar when the US share market is falling, and vice-versa. In other words, the Aussie currency tends to perform well when markets are rising, which is linked to demand for Australia’s resources-heavy exports,” says Walesby.

Through an ETF like the ETFS Enhanced USD Cash ETF (ASX code: ZUSD), investors can look to diversify their cash holdings, and also trade their shorter-term views and expectations of currency exchange rates.

Walesby says that establishing a cash holding in ZUSD gives the investor the benefit of this “flight-to-safety” situation in the greenback. It aims to track the performance of an interest-bearing US dollar cash deposit, by investing in US dollar bank deposits with maturities ranging from overnight to three months, and earning a variable rate of interest.

“An investor could use ZUSD as a defensive diversifying position: much like equities and fixed income, diversifying cash can assist with risk management, particularly in volatile periods. For example, holding a currency other than the Australian dollar can buffer the cash allocation in periods where the Australian dollar is weak. Given the importance of the US$/A$ exchange rate, the greenback makes sense as the obvious – and easiest – currency to use in this way.”

Walesby says: “Investors can also use cash investments to make tactical decisions on how they expect a currency to perform. For example, investors who believe the US dollar is likely to appreciate, may increase their cash allocation to the US dollar, while those who believe it is likely to depreciate may choose to reduce their allocation.

“At any time, taking an “enhanced” approach to the US dollar can bring many benefits to a portfolio – and in uncertain and volatile markets like the present, those benefits can be magnified.

“ZUSD is the only physical US dollar ETF offering quarterly distributions. This income can augment the diversification benefit,” he says.

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