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ETFs to Tap Dollar Surge Amid Rising Rates

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The U.S. dollar against the basket of other currencies has been on a surge in the present rising interest rate environment. The U.S. Dollar Index hit its highest level since Mar 25, 2020, having gained 10% over the past year (see: all the Currency ETFs here).

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 Federal Reserve raised the interest rates by 25 bps for the first time in three years and is expected to follow a more aggressive path in raising rates to fight the 40-year high inflation. The central bank is now expected to hike rates by 50 basis points at its May and June meetings to curb rapid inflation. Fed funds futures traders expect the Fed’s benchmark rate to increase to 1.28% in June and 2.67% next February from the current 0.33% (read: ETF Areas Poised to Gain from Fed's Aggressive Tone).

Fed Chair Jerome Powell showed confidence that the American economy is strong enough to withstand a tighter monetary policy. The move indicates a healthy economy and is expected to pull in more capital into the country and lead to an appreciation of the U.S. dollar.

A strong dollar attracts foreign money from investors seeking dollar-denominated returns, providing an edge to the domestic-focused companies. Further, energy cost in America decreases with a stronger dollar, thereby lowering industrial cost, increasing profitability and propelling the overall economy.

Let’s now discuss the ETFs in detail:

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.

The fund has managed an asset base of $1 billion while seeing an average daily volume of around 1.6 million 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 $442 million in AUM and trades in a lower volume of about 321,000 shares per day on average. It charges 50 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 2,013 stocks by tracking the Russell 2000 Index, with none holding more than 0.53% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with AUM of $57.4 billion and an average trading volume of around 27 million shares (read: Should You Buy the Dip in Small-Cap ETFs Now?).

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

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 $3.4 billion and trades in a solid volume of 700,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.