U.S. Markets closed

ETFs to Gain & Lose From a Strong Dollar

Sweta Killa

After taking a beating in recent weeks, the dollar rebounded strongly on signs of progress in trade negotiations and speculation of stimulus globally to shore up economic growth. Notably, the Bloomberg dollar index climbed to its highest level of this year.

In the positive trade talks, Washington extended a 90-day temporary license allowing China’s Huawei Technologies to continue doing business with U.S. firms. Major central banks across the globe are stepping up efforts to prop up slowing economic growth that has eased global recession concerns and are in turn driving dollar higher (read: Quality ETFs & Stocks to Beat the Market).

China’s central bank unveiled a key interest rate reform to lower borrowing costs for companies while Germany is ready to potentially free up 50 billion euros ($82 billion) of extra spending. The European Central Bank is expected to cut rates in September and resume a bond-buying program while the Federal Reserve might signal further rate cuts this year. In the rate cuts stampede, Mexico is the latest country to cut interest rates last week.

Against such a backdrop, the bullish trend in the dollar is likely to continue at least in the near term.

Strong Dollar: A Boon & Bane

A strong dollar will lead to a rally in the stock market as it attracts foreign money from investors seeking dollar-denominated returns instead of their home currencies. Additionally, energy cost in America decreases with a strong dollar, thereby lowering industrial cost and increasing profits, thereby propelling the overall economy.

While a strong dollar provides an edge to the domestic-focused companies, it makes dollar-denominated assets expensive for foreign investors, making U.S. multinational products uncompetitive and leading to lower demand and profits. As such, companies having a higher percentage of international sales will likely underperform in a rising dollar environment. Moreover, commodities, emerging markets and gold mining stocks are also hurt by a strong dollar (read: How to Bet on Gold Surge With ETFs & Stocks).

Given this, we have highlighted ETFs that should benefit from a strong dollar and the ones that will lose.

ETFs to Gain

Invesco DB US Dollar Index Bullish Fund UUP: UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies. The fund has so far managed an asset base of $346.5 million, while sees an average daily volume of about 602,000 shares. It charges 79 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Top ETFs of July That Rose 10% or More).

iShares Russell 2000 IWM: The strength in U.S. dollar, which makes domestic goods more expensive overseas, will drive small-cap stocks higher. IWM targets the small-cap segment of the broad U.S. stock market, charging investors 19 bps in annual fees. IWM is the most popular and liquid choice in the small-cap space with AUM of $40.2 billion and average trading volume of around 20.1 million shares. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETF Assets Swell in July: What's Hot, What's Not).

iShares Currency Hedged MSCI EAFE ETF HEFA: Currency-hedged ETFs tend to win in a rising dollar environment as these strip out currency exposure to a foreign economy via the use of currency forwards or other instruments that bet against the non-dollar currency, while at the same time offering exposure to international stocks. HEFA offers exposure to a wide array of Europe, Australasia, and Far East equities, while at the same time providing hedge against any fall in foreign currencies relative to the U.S. dollar. It has amassed $2.8 billion in its asset base and trades in a good average daily volume of 414,000 shares. The product charges 34 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

ETFs to Lose

Vanguard Mega Cap Growth ETF MGK: A strong dollar led to rough trading in blue chip companies, which derive most of their revenues from international markets. With AUM of $4.3 billion, this ETF offers diversified exposure to the largest growth stocks in the U.S. market. It charges 7 basis points in annual fees and trades in a good volume of around 155,000 shares a day on average. The fund has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Invesco DB Commodity Index Tracking Fund DBC: This fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on 14 physical commodities, with heavyweights going to the energy and agriculture. The fund charges 89 bps in annual fees and trades in a solid volume of 945,000 shares per day. The product has managed assets of $1.4 billion.

iShares MSCI Emerging Markets ETF EEM: A strengthening dollar leads to pulling out capital from these markets, stirring up trouble for most emerging nations. This product offers exposure to large and mid-sized companies in the emerging markets. It is the most popular and widely traded emerging market ETF with AUM of $24.8 billion and average daily volume of more than 66.4 million shares. The fund charges 67 bps in fees per year from investors and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: ETF Winners & Losers of Last Week).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>