NEW YORK (TheStreet) -- Investors should be wary of the euphoria that has followed the announcement of a roughly $1 trillion bailout package for the eurozone's troubled countries.
I would advise investors to not bet on the euro in the long term and to move away from European equity ETFs. Instead, investors should move into U.S. equity ETFs such as
Dow Jones Select Dividend Index
is also one of my top picks as a way to gain exposure to U.S. stocks, which I believe will perform better than European equities going forward.
Despite the size of the bailout, those debt-troubled countries in the euro-zone still have to put in place austere government spending policies. The attempts will be met with protests like the ones seen in Greece, putting pressure on governments to avoid necessary budget cuts. For those that do cut, effects will be negative for GDP growth, as with Ireland in the past year. There will also be significant pressure on these governments to leave the euro-zone.
It's not just the weak that may leave the eurozone. After the debacle over Greece and the high cost of the bailout, many German citizens want to exit the currency bloc. Even if the scenario of a member-state leaving the euro-zone does not come to pass, the public outcry over austerity measures and doubts about the currency union will create serious headwinds for the euro.
The political will that is needed to maintain the euro may also flag in countries such as Germany, where the pro-bailout Chancellor Angela Merkel lost the majority her party commanded in the country's upper-house of parliament on Sunday.
Confidence in political leadership slipped again on Monday, when Moody's warned on Portuguese and Greek debt, in addition to a possible wider European contagion. After launching the huge bailout effort, the perception is that Europe cannot control the situation.
Speculation that Europe can spiral out of control abounds in markets and in the media, making it more difficult for the euro and equities to rally. The uncertainty of U.S. markets on Tuesday, just one day after rebounding on the bailout news, exemplifies how the bailout is being second-guessed.
All of this means the euro is unlikely to reverse its recent losses versus the U.S. dollar. Investors should also remember that the dollar weakened against major currencies in 2009 after the government spent a large amount of money to prevent the financial crisis from worsening. The same trend will likely appear in Europe. ETFs such as
CurrencyShares Euro Trust
should not be used for more than short-term speculation.
A better play is to bet on the U.S. dollar against a basket of currencies, including the euro, with
PowerShares DB US Dollar Index Fund
. More insecurity from Europe will also make gold an attractive hedge against market failure.
Investors who want gold plus equity exposure can use
Market Vectors Gold Miners
. Those bearish on equities or who want some hedged exposure can go with a physically backed fund such as
SPDR Gold Shares
European equity ETFs will also fare poorly since a continued slide in the value of the euro against the dollar would be a headwind for ETFs holding euro denominated assets.
It's true that a cheaper euro will make European exports more attractive, but the post-recession American economy may not have as large an appetite for spending as in the past. Also, with China taking measures to cool off its economy, Chinese demand for European exports are also likely to be tepid.
Even if European equities manage to rally in local currency, the weaker euro will lower those returns below those of the United States. More likely, the stronger economy will mean U.S. stocks will outperform European stocks by a considerable margin.
In America, the manufacturing and services sectors are expanding, and I continue to advise investors to form a long-term core strategy based on U.S. equity. I believe the best way to do that right now is by increasing exposure to funds such as SPY, QQQQ, DIA, or DVY. DVY is particularly appealing for an uncertain market environment since it tracks some of the strongest dividend-paying American companies.
Investors looking for more safety can add gold exposure with GLD. For those interested in adding a currency component to a portfolio, I would recommend a conservative fund that bets on the dollar, such as UUP.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion Money Management was long Market Vectors Gold Miners, Dow Jones Select Dividend Index, iShares Comex Gold ETF.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.