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ETFs to Gain on a Strong Dollar

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The latest minutes from the July Fed meeting revealed the possibility of longer-than-expected higher interest rates, pushing the U.S. dollar higher. A strong dollar attracts foreign money from investors seeking dollar-denominated returns, providing an edge to domestic-focused companies.

Additionally, energy cost in America decreases with a stronger dollar, thereby lowering industrial cost, increasing profitability and propelling the overall economy. Investors seeking to benefit from the strength in the greenback 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) .

The latest minutes from the Fed's July meeting showed “most” policymakers continued to prioritize the battle against inflation, while “some participants” cited risks to the economy of pushing rates too far. The latest data on retail sales also stoked fears of continued higher interest rates. U.S. retail sales came in better than expected, rising 0.7% in July (read: ETF Areas & Stocks to Win on Upbeat July Retail Sales).

Additionally, inflation in the United States rose for the first time in July after 12 straight months of decline. The Consumer Price Index rose 3.2% year over year, up from an annual increase of 3% in June, which was the lowest rate in over two years. Although inflation has dropped from a peak of 9.1%, it is still significantly above the Federal Reserve's 2% target.

Further, the Fitch downgrade of U.S. credit rating and multiple bank downgrades have raised the appeal for the greenback as a safe-haven play.

Fitch Ratings downgraded the U.S. credit rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden. This has resulted in a strong sell-off in the stocks and a surge in yields. Meanwhile, ratings agency, Moody's downgraded the credit ratings of several small to mid-sized U.S. banks and warned that it may downgrade some of the nation's biggest lenders too, citing a looming mild recession, higher interest rates and increased funding costs.

Let’s now discuss the ETFs in detail:


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 managed an asset base of $534.7 million while seeing an average daily volume of around 1 million shares. UUP charges 77 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


WisdomTree Bloomberg U.S. Dollar Bullish Fund is another way to play the rise in the 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 $222.4 million in AUM and trades in a good volume of about 210,000 shares per day on average. It charges 50 bps in annual fees.


A strong dollar provides an edge to 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 1,993 stocks by tracking the Russell 2000 Index, with none holding more than 0.5% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with AUM of $54.7 billion and an average trading volume of around 26 million shares (read: 4 Reasons to Bet on 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.


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 $3.5 billion and trades in a solid volume of 480,000 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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