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The U.S. dollar hit a 16-month high, following inflation data, which shows that consumer prices climbed at the fastest pace in more than 30 years.
A strong dollar will propel the stock market higher as it attracts foreign money from investors seeking dollar-denominated returns instead of their home currencies. Additionally, energy cost in America decreases with a stronger dollar, thereby lowering industrial cost, increasing profitability and propelling the overall economy.
Investors seeking to make a play from this trend could consider ETFs such as Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) , iShares Russell 2000 ETF (IWM - Free Report) and iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report) .
Inside The Dollar Surge
The consumer price index rose 6.2% year over year in October, the highest since December 1990 and exceeded the 5.4% year-over-year rise in September. A steep rise in inflation has pushed the yields higher and fueled speculation that the Federal Reserve may raise interest rates sooner than expected to combat surging consumer prices (read: TIPS ETFs to Track as Inflation Soars the Most in 3 Decades).
Traders in the futures markets now expect the first Federal Reserve interest rate hike in July 2022 compared with September, following a hotter-than-expected inflation report. According to the CME FedWatch tool, there’s a 47.2% probability that the Fed will raise interest rates in June, a jump from 27% probability a month ago. Similarly, traders expect the second rate hike to happen in November, followed by a third in February 2023. The increased expectation for rate hikes has given a boost to the dollar.
The central bank is expected to begin tapering bond purchases “later this month.” It will reduce bond purchases by $15 billion a month, putting it on track to end the quantitative easing by the middle of next year. The move indicates a solid recovery in the U.S. economy. A healthy economy is expected to pull in more capital into the country and lead to the appreciation of the U.S. dollar.
Let’s now discuss the ETFs in detail below:
UUP
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 (see: all the Currency ETFs here).
The fund has so far managed an asset base of $511.6 million while seeing an average daily volume of around 797,000 shares. UUP charges 78 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
USDU
WisdomTree Bloomberg U.S. Dollar Bullish Fund is another way to play the rise in dollar directly. It offers exposure to the U.S. dollar against a basket of foreign currencies by tracking the Bloomberg Dollar Total Return Index. WisdomTree Bloomberg U.S. Dollar Bullish Fund exhibits strong negative correlations to international equity and bond portfolios.
WisdomTree Bloomberg U.S. Dollar Bullish Fund has amassed $149.6 million in AUM and trades in a lower volume of about 39,000 shares per day on average. It charges 51 bps in annual fees.
IWM
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 2,022 stocks by tracking the Russell 2000 Index, with none holding more than 0.62% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with AUM of $75.6 billion and average trading volumes of around 24.7 million shares.
iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Reasons to Bet on Small-Cap ETFs).
HEFA
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 AUM of $3.2 billion and trades in a solid volume of 380,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.
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4 ETFs to Benefit From Strengthening Dollar
The U.S. dollar hit a 16-month high, following inflation data, which shows that consumer prices climbed at the fastest pace in more than 30 years.
A strong dollar will propel the stock market higher as it attracts foreign money from investors seeking dollar-denominated returns instead of their home currencies. Additionally, energy cost in America decreases with a stronger dollar, thereby lowering industrial cost, increasing profitability and propelling the overall economy.
Investors seeking to make a play from this trend could consider ETFs such as Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) , iShares Russell 2000 ETF (IWM - Free Report) and iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report) .
Inside The Dollar Surge
The consumer price index rose 6.2% year over year in October, the highest since December 1990 and exceeded the 5.4% year-over-year rise in September. A steep rise in inflation has pushed the yields higher and fueled speculation that the Federal Reserve may raise interest rates sooner than expected to combat surging consumer prices (read: TIPS ETFs to Track as Inflation Soars the Most in 3 Decades).
Traders in the futures markets now expect the first Federal Reserve interest rate hike in July 2022 compared with September, following a hotter-than-expected inflation report. According to the CME FedWatch tool, there’s a 47.2% probability that the Fed will raise interest rates in June, a jump from 27% probability a month ago. Similarly, traders expect the second rate hike to happen in November, followed by a third in February 2023. The increased expectation for rate hikes has given a boost to the dollar.
The central bank is expected to begin tapering bond purchases “later this month.” It will reduce bond purchases by $15 billion a month, putting it on track to end the quantitative easing by the middle of next year. The move indicates a solid recovery in the U.S. economy. A healthy economy is expected to pull in more capital into the country and lead to the appreciation of the U.S. dollar.
Let’s now discuss the ETFs in detail below:
UUP
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 (see: all the Currency ETFs here).
The fund has so far managed an asset base of $511.6 million while seeing an average daily volume of around 797,000 shares. UUP charges 78 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
USDU
WisdomTree Bloomberg U.S. Dollar Bullish Fund is another way to play the rise in dollar directly. It offers exposure to the U.S. dollar against a basket of foreign currencies by tracking the Bloomberg Dollar Total Return Index. WisdomTree Bloomberg U.S. Dollar Bullish Fund exhibits strong negative correlations to international equity and bond portfolios.
WisdomTree Bloomberg U.S. Dollar Bullish Fund has amassed $149.6 million in AUM and trades in a lower volume of about 39,000 shares per day on average. It charges 51 bps in annual fees.
IWM
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 2,022 stocks by tracking the Russell 2000 Index, with none holding more than 0.62% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with AUM of $75.6 billion and average trading volumes of around 24.7 million shares.
iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Reasons to Bet on Small-Cap ETFs).
HEFA
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 AUM of $3.2 billion and trades in a solid volume of 380,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.