5 ETFs For “Agreeing” With 2010 Economic Forecasters

19 January 2010 at 1:57 pm by Gary Gordon

The Economist polls a wide variety of economic forecasters to come up with consensus readings on inflation (consumer prices) and GDP growth. Similarly, Bloomberg has sought median forecasts on year-end changes on world currencies.

Here’s a quick summation on what the business journalists found:

1. Nearly all consumers in the developed world will see rising prices (a.k.a. inflation), though the erosion of purchasing power will be less than the historical norm. What’s more, since last month, polled economists raised their 2010 inflation expectations on 7 of the 13 developed countries investigated.

Translation? There will be a some inflation… and it will be greater than originally anticipated.

An ETF investor who agrees with the economic consensus might wish to purchase inflation protection in a variety of asset classes. Inflation-protected treasuries via the iShares Barclays TIPS Fund (TIP) will provide income that is adjusted for the Consumer Price Index. (Of course, investors will have to consider the adverse affect of rising interest rates on the potential decline in price on TIP.)

Although many a pundit has been talking up a “bubble” in gold, the precious metal is relished for its inflation-fighting properties as much as its luster. The SPDR Gold Shares (GLD) may be your ticket to ride. Or you may wish to diversify across your metals.

Under a subdued inflationary backdrop, stock assets have a history of rising in price as well. Traditionally, oil and energy stocks fit the task of hedging against inflation. Consider a global energy-themed ETF like iShares Global Energy (IXC).

2. Japan is the only country with a deflationary forecast at -0.8% for 2010. The Bank of Japan is also expected to keep its benchmark interest rate target on hold throughout the year as it battles deflation. Consequently, the yen is expected to drop 7.3% to 98 per dollar from 90.84.

With foreign exchange volatility declining, and the Japanese yen very likely to decline in value versus other currencies, investors will be lured back to the “carry trade.” This is where one sells currencies from countries with lower interest rates to buy higher-yielding ones. Naturally, there’s an ETF for that… PowerShares DB G10 Currency Harvest (DBV).

If the collective view of economists is one that you share, you might look at the possibility of “betting against” the yen. For instance, ProShares UltraShort Yen (YCS) seeks a return of -200% of the U.S. dollar price of the yen.

BUT ONLY FOR A SINGLE DAY. Due to the way compounding works, you can’t buy-n-hold YCS for a year and expect to have anything close to 2x the inverse (14.6% return) suggested by the consensus annual yen depreciation. Instead, wait for a trader’s opportunity to buy on weakness as well as a trader’s opportunity to sell on strength.

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”, via podcast or on your iPod. If you’d like to subscribe to ETF Risk Alert, click here.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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