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4 ETF Ways to Profit from a Rise in Dollar

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After being depressed for most of this year, the U.S. dollar is showing immense strength lately with the dollar index hitting the highest level since Aug 17. This is especially true, as positive sentiments have started to build up in the space with hawkish comments from the Fed and rounds of upbeat data.

Inside The Rise

The activity is picking up faster in the U.S. economy, building up solid momentum and indicating the underlying strength in the economy. This is especially true because manufacturing activity, as measured by the Institute for Supply Management, reached a 13-year high in September thanks to strong gains in new orders and raw material prices.

The expansion makes the path clearer for another rate hike this year. The Fed will start unwinding its massive $4.5 trillion balance sheet this month and has hinted at one more rate hike in 2017, with three lifts-off in store for 2018.

Per the CME's Fedwatch indicator, the odds of a December rate hike increased to 76.7% from 71.4% last week and just 42% at the start of September. The increased expectation for rate hikes has boosted dollar and will likely continue to do so (read: Best ETF Strategies for a Hawkish Fed).

The final reading shows that U.S. GDP expanded at a slightly faster rate of 3.1% in the second quarter than the previously estimated 3%. This represents the fastest pace of growth since the first quarter of 2015. The labor market has also been impressive with solid job growth and steadily rising wages, the housing market is seeing solid recovery, and oil prices have stabilized. A healthy economy is expected to pull in more capital into the country and lead to appreciation of the U.S. dollar.

Further, Trump has proposed the biggest U.S. tax overhaul in three decades, which is providing huge support to the greenback. Renewed hopes of tax cuts by the end of the year have led to increased optimism in the economy and the resultant rise in dollar. If these weren’t enough, the drop in euro is an added advantage to the greenback. Political uncertainty in Europe following the vote in Catalonia has led to a decline in the currency (read: How Catalonia Dispute May Impact Spain ETFs).

Given the encouraging fundamentals, the bullish trend in the greenback is expected to continue at least for the short term. Investors seeking to make a play on the U.S. dollar could consider any of the following ETFs:

PowerShares DB US Dollar Bullish Fund (UUP - Free Report)

UUP 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 US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $642.9 million while sees an average daily volume of around 1.1 million shares. It charges 80 bps in annual fees and added 1% last month. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Currency ETFs here).

WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report)

The product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. The fund allocates more to the Euro zone currency at 31.5%, closely followed by Japanese yen (18%) and Canadian dollar (11.5%). It has amassed $139.5 million in AUM and trades in lower volume of about 46,000 shares per day on average. Expense ratio comes in at 0.50% and the ETF was up 1.6% in the past one month.

iShares Russell 2000 (IWM - Free Report)

This ETF will benefit from a rising dollar as small caps are closely tied to the U.S. economy and do not have much exposure to the international market. The product provides exposure to a broad basket of 2,004 stocks by tracking the Russell 2000 Index with none holding more than 0.42% of assets. IWM is the most popular and liquid choice in the small cap space with AUM of $41.1 billion and average trading volumes of around 25.4 million shares. It charges 20 bps in annual fees and gained 7% in one month. The product has a Zacks ETF Rank #3 with a Medium risk outlook (read: Three Reasons to Bet on Small Cap ETFs Now).

WisdomTree Europe Hedged Equity Fund (HEDJ - Free Report)

Currency hedged ETFs look to be the winners of 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 offer exposure to international stocks. HEDJ offers exposure to a wide array of European stocks while at the same time provides hedge against any fall in the euro. It has amassed $9 billion in its asset base and trades in a solid average daily volume of 1.5 million shares. The product charges 58 bps in annual fees and has returned 4.5% in a month. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Bottom Line

A stronger domestic economy, bullish global fundamentals, and rising rates should propel the U.S. dollar higher in the coming months. Investors could ride this surge with less risk with the above-mentioned ETFs.

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