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Dollar at 20-Year High: ETFs to Gain & Lose

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The U.S. dollar against a basket of currencies has been rising lately, soaring to a 20-year high. Rising fears of a global recession and the Fed Chair Jerome Powell’s speech strengthened the greenback. The dollar has posted its biggest weekly gain since April 2020 (read: U.S. Dollar ETF Hits New 52-Week High).

Jerome Powell said that the Fed will likely need to keep interest rates high to slow the economy “for some time” to curb high inflation. While a tight monetary policy "for some time" will bring down inflation from a 40-year high, it also means slower growth, a weaker job market and "some pain" for households and businesses.

According to the CME FedWatch tool, nearly half of market participants expect the Fed funds rate to end the year above 3.7%, up from 40% a week ago. The Fed raised its benchmark federal-funds rate by 0.75 percentage point at each of its last two meetings to a range between 2.25% and 2.5%. Further, the inverted yield curve is signaling a massive ‘recession’ anytime soon, thereby lifting demand for the dollar as a safe-haven play.

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, and propelling the overall economy in turn.

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, inducing lower demand and profits. Companies with a higher percentage of international sales will likely underperform in a rising dollar environment. Moreover, commodities, emerging markets and gold mining stocks are hurt by a strong dollar.

Against this backdrop, we highlighted ETFs that should benefit from a strong dollar and those that will lose.

ETFs to Gain

Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)

Invesco DB US Dollar Index Bullish Fund 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 USD Currency Portfolio Index - Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, Invesco DB US Dollar Index Bullish Fund allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound.

The fund managed an asset base of $2 billion while seeing an average daily volume of around 3 million shares. UUP charges 77 bps of annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares Russell 2000 ETF (IWM - Free Report)

A strong dollar provides an edge to the domestic-focused companies as small caps do not have much exposure to the international market. iShares Russell 2000 ETF will benefit from a rising dollar. It provides exposure to a broad basket of 1,970 stocks by tracking the Russell 2000 Index. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space with an AUM of $56.8 billion and an average trading volume of 20.6 million shares (read: Should You Buy Small Cap ETFs Now?).

iShares Russell 2000 ETF charges 19 bps of annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report)

The strength in the greenback would compel investors to recycle their portfolios into the currency-hedged ETFs. For those seeking exposure to the developed market, iShares Currency Hedged MSCI EAFE ETF could be an intriguing pick. It targets the developed international stock market in Europe, Australasia and the Far East with no currency risk. iShares Currency Hedged MSCI EAFE ETF tracks the MSCI EAFE 100% Hedged to USD Index.

The fund has an AUM of $3.7 billion and trades in a solid volume of 738,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.

ETFs to Lose

Vanguard Mega Cap Growth ETF (MGK - Free Report)

A strong dollar led to rough trading in blue chip companies, which derive most of their revenues from international markets. With an AUM of $12 billion, Vanguard Mega Cap Growth ETF offers diversified exposure to 99 largest growth stocks in the U.S. market. It follows the CRSP US Mega Cap Growth Index.

Vanguard Mega Cap Growth ETF charges 7 basis points as annual fees and trades in a good volume of around 331,000 shares a day, on average. The fund has a Zacks ETF Rank #2 with a Medium risk outlook (read: Growth ETFs Shining to Start Second Half: Here's Why?).

Invesco DB Commodity Index Tracking Fund (DBC - Free Report)

Invesco DB Commodity Index Tracking Fund follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return, composed of futures contracts on 14 of the most heavily-traded and important physical commodities in the world.

With an AUM of $3.7 billion, Invesco DB Commodity Index Tracking Fund trades in a volume of 4 million shares per day, on average, and charges 87 bps of annual fees.

iShares MSCI Emerging Markets ETF (EEM - Free Report)

A strengthening dollar leads to pulling out capital from these markets, stirring up trouble for most emerging nations. iShares MSCI Emerging Markets ETF offers exposure to large and mid-sized companies in the emerging markets and follows the MSCI Emerging Markets Index. iShares MSCI Emerging Markets ETF holds 1,236 securities with Chinese firms making up for 31.7% of the portfolio while Taiwan, India and South Korea round off the next three spots with a double-digit exposure each.

iShares MSCI Emerging Markets ETF charges 68 bps of annual fees and trades in an average daily volume of 33.3 million shares. EEM has an AUM of $26.5 billion and a Zacks ETF Rank #3 with a Medium risk outlook.

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