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5 ETFs to Profit From a Dollar Rebound

Sweta Killa
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After weak trading in the first quarter, the U.S. dollar resumed its strength lately spurred by a rise in bond yields. Notably, the 10-year yield jumped to above 3%, marking the highest level since early 2014 while the Bloomberg Dollar Spot Index increased to the highest in almost 15 weeks (read: ETFs to Benefit or Lose from Rising Yields).

The yield curve is steepening after a long period of flattening, easing fears of a future downturn for the U.S. economy and sparking a rally in the greenback. This is because a flattening curve is commonly seen as a warning sign for a potential economic downturn.

Additionally, de-escalation of trade tensions as well as renewed expectation of a stronger economy is supporting the dollar. Tax cuts and increased fiscal spending has been the major catalyst boosting economic growth and thus the dollar. The latest round of upbeat data including consumer confidence and new home sales has also bolstered the case for the economy. A healthy economy is expected to pull in more capital into the country and lead to appreciation of the U.S. dollar.

Further, inflationary expectations buoyed by a spike in commodity prices are sparking speculation of four rate hikes this year. Per the latest CME's FedWatch tracking tool, the market is projecting 50% chances of a total of four interest rate hikes this year. This compares to 33% probability a month ago and less than 40% late last week. The increased expectation for rate hikes has given a boost to the dollar (see: all the Currency ETFs here).

Given the encouraging fundamentals, the bullish trend in the greenback is expected to continue at least for the short term. Investors seeking to make a play on the U.S. dollar could consider any of the following ETFs:

PowerShares DB US Dollar Bullish Fund UUP

UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound. The fund has so far managed an asset base of $520.3 million while sees an average daily volume of around 1.1 million shares. It charges 80 bps in annual fees and added 1.6% over the past week. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Are Dollar ETFs Poised for More Losses in 2018?).

WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU

The product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. The fund allocates more to the Euro zone currency at 63.3%, closely followed by Japanese yen (17.8%) and Canadian dollar (11.8%). It has amassed $50 million in AUM and trades in a lower volume of about 60,000 shares per day on average. Expense ratio comes in at 0.50% and the ETF is up 2% over the past week.

iShares Russell 2000 IWM

This ETF will benefit from a rising dollar as small caps are closely tied to the U.S. economy and do not have much exposure to the international market. The product provides exposure to a broad basket of 1,980 stocks by tracking the Russell 2000 Index with none holding more than 0.60% of assets. IWM is the most popular and liquid choice in the small-cap space, with AUM of $42.6 billion and average trading volumes of around 24.8 million shares. It charges 20 bps in annual fees and shed 1.7% over the past week. The product has a Zacks ETF Rank #3 with a Medium risk outlook (read: Winning ETF Areas of March).

iShares Currency Hedged MSCI EAFE ETF HEFA

The strength in the greenback would compel investors to recycle their portfolio into the currency hedged ETFs. For those seeking exposure to the developed market, HEFA could be an intriguing pick. HEFA targets the developed international stock market with no currency risk and tracks the MSCI EAFE 100% Hedged to USD Index. It has AUM of $3.6 billion and trades in solid volume of 1.1 million shares. The fund charges 35 bps in fees per year from investors and added 0.6% over the past week. It has a Zacks ETF Rank #3 with a Medium risk outlook.

ProShares Short MSCI Emerging Markets EUM

Emerging markets generally lose their appeal in a rising dollar environment. As such, an outright short on this market via EUM could be a winning bet. The ETF seeks to provide inverse of the daily performance of the MSCI Emerging Markets Index, charging 95 bps in annual fees. It has accumulated $145.1 million in its asset base and trades in good average daily volume of 442,000 shares. The fund has gained 2.3% over the past week.

Bottom Line

A stronger domestic economy, bullish global fundamentals, and rising rates should propel the U.S. dollar higher in the coming months. The above-mentioned ETFs could help investors ride this surge with less risk.

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