ETF Expert

The flight-to-safety play in 2008 didn't include gold. In fact, it was mostly concentrated in U.S. treasuries, the U.S. dollar and the Japanese yen.

In 2009, however, both gold and the dollar have climbed. Why the U.S. dollar continues to perform well is a bit of a mystery to those who have predicted its destruction. With trillions upon trillions of debt… and the printing presses seemingly rolling non-stop… it does seem strange that the world's most established currency is still hanging onto its reign.

In contrast, the Japanese yen is down more than 10% since it peaked mid-December of last year. The yen has actually fallen below the levels seen at the height of credit anxiety during the October and November low points.

The primary ETF for yen investors is the CurrencyShares Japanese Yen Trust (FXY) shown in the chart below. This ETF has already dropped substantially below its 50-day moving average. However the yen would have to drop another 2.5% in value or more to fall below its longer-term, 200-day trendline.

With stock markets all but scraping new February lows clear across the world, why is the yen struggling? In recent memory, the yen typically rose with risk aversion… as it did at the start of the "collapse" in mid-September of last year. One can see that, at that time, the CurrencyShares Japanese Yen Trust (FXY) climbed above its 200-day moving average. (Is the yen now looking to trend in the other direction?)

Japan is more dependent on its exports for economic success than nearly any other nation. The global recession and the strengthening of Japan's currency has made it terribly difficult for its multinationals to sell products to the world. The weaker the yen, the better their exports fare… but the stronger the yen, the more trouble Japan faces. T

That's why Japan's leaders have been desperately seeking ways to weaken the yen. Perhaps the Japanese government is having some success with policy. Or, possibly, investors are beginning to take more risk with their money again.

Curiously, if policy direction is succeeding, then one might expect the iShares MSCI Japan Fund (EWJ) to perform better than it has. After all, the weaker yen would boost the prospects for the Sonys and Toyotas in the index. Nevertheless, we're seeing Japanese equities fall to new lows in February, much as we've seen in the U.S.

So if the yen is falling because there's greater risk appetite, why aren't we seeing stocks respond? It's likely that the risk being taken is far more incremental; that is, investors are returning to high-grade corporate bonds, but they haven't been willing to go further out on the risk tree limb. (Some of that money may be going into hedges and hot money like gold too!)

Beneficiaries may possibly include the iSharesIntermediate Credit Bond Fund (CIU), the Treasury Inflation-Protected Securities Fund (TIP) and a number of individual bonds as well. For example, Toyota Motor Credit Corp has an A-rated issue with a 6% coupon that's trading above par at 102. This offering goes out to 2021 with a 5.8% yield-to maturity.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.