To buffer volatility, Davidow says advisors are increasingly looking at alternative investments. He mentions Rydex's currency-based exchange-traded trusts, which give portfolios exposure to the euro, dollar, yen and six other major currencies.
Davidow says currencies have historically exhibited a low correlation to traditional exposures such as equity and fixed income, complementing traditional asset classes to dampen a portfolio's volatility. According to a recent research report by Davidow, many currencies have served as a hedge to equities and fixed income because of their low correlation. Over the past five years, as of March 31,2011, a basket of currencies, represented by the U.S. Dollar Index, exhibited a -0.56 correlation to equities, and a -0.41 correlation to fixed income.
Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.