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The U.S. dollar has been on a tear this year thanks to the dual tailwinds of a rising rate scenario and an improving domestic economy. The Fed has raised interest rates twice this year in quarter-point increments and is expected to implement two more lift-offs by the end of the year. In his latest testimony, Powell painted an optimistic view of the economy, citing that America is expanding at a faster pace.
The American economy has expanded 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. The historic tax cuts, infrastructure investment, higher government spending, deregulation, rising wages and record unemployment are expected to drive growth further. Per Trump, “the United States is on track to hit the highest annual growth rate in over 13 years." A healthy economy is expected to pull in more capital into the country and lead to appreciation of the U.S. dollar (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).
Further, escalating trade dispute between the United States and China, and now the rout in the Turkish lira has raised the appeal for the greenback as one of the safe-haven avenues. This is especially true as Turkish lira was in a free-fall territory, nosediving as much as 11% against the dollar on Aug 13 after plummeting more than 20% on Aug 10. With this slide, the lira is down more than 40% against the dollar since the start of the year. The slump came on the back of worries about president Tayyip Erdogan's influence over monetary policy and a worsening U.S. relationship (read: 6 ETFs in Focus as Turkey Crisis Worsens).
Strong Dollar: A Boon & A Bane
A strong dollar led 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 the industrial cost and increasing the profitability and a resultant boon to the overall economy.
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, leading to lower demand and less profits. As such, companies having a higher percentage of international sales will likely underperform in a rising dollar. Moreover, commodities, emerging markets as well as gold mining stocks also get hurt by a strong dollar (read: Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).
Given this, we have highlighted ETFs that should benefit from a strengthening dollar and the ones that will lose.
ETFs to Win
Invesco DB US Dollar Index 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. The fund has so far managed an asset base of $515 million while sees an average daily volume of around 1.1 million shares. It charges 79 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares Russell 2000 (IWM - Free Report) : This ETF targets the small-cap segment of the broad U.S. stock market, charging investors 19 bps in annual fees. IWM is the most popular and liquid choice in the small-cap space with AUM of $46.4 billion and average trading volumes of around 21.2 million shares. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report) : Currency hedged ETFs win in 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. HEFA offers exposure to a wide array of Europe, Australasia, and the Far East equities while at the same time provides hedge against any fall in the foreign currencies relative to the U.S. dollar. It has amassed $3.4 billion in its asset base and trades in a good average daily volume of 841,000 shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Currency Hedged ETFs Gaining Love on Rising Dollar).
ETFs to Lose
Vanguard Mega Cap Growth ETF (MGK - Free Report) : A strong dollar has led to rough trading in blue chip companies, which derive most of their revenues from international markets. With AUM of $4 billion, this ETF offers diversified exposure to the largest growth stocks in the U.S. market. It charges 7 basis points in annual fees and trades in good volume of around 155,000 shares a day on average. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.
PowerShares DB Commodity Index Tracking Fund (DBC - Free Report) : This fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on 14 physical commodities, with heavyweights going to the energy and agriculture. The fund charges 89 bps in annual fees, while trades in a solid volume of 2.7 million shares per day. The product has managed assets of $2.5 billion.
iShares MSCI Emerging Markets ETF (EEM - Free Report) : This product offers exposure to large and mid-sized companies in emerging markets. It is the most-popular and widely traded emerging market ETF with AUM of $31.3 billion and average daily volume of more than 67.7 million shares. The fund charges 69 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook (read: EM ETFs Rebound in July: Value Trap or Value Play?).
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Dollar on a Bull Ride: ETFs to Buy/Avoid
The U.S. dollar has been on a tear this year thanks to the dual tailwinds of a rising rate scenario and an improving domestic economy. The Fed has raised interest rates twice this year in quarter-point increments and is expected to implement two more lift-offs by the end of the year. In his latest testimony, Powell painted an optimistic view of the economy, citing that America is expanding at a faster pace.
The American economy has expanded 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. The historic tax cuts, infrastructure investment, higher government spending, deregulation, rising wages and record unemployment are expected to drive growth further. Per Trump, “the United States is on track to hit the highest annual growth rate in over 13 years." A healthy economy is expected to pull in more capital into the country and lead to appreciation of the U.S. dollar (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).
Further, escalating trade dispute between the United States and China, and now the rout in the Turkish lira has raised the appeal for the greenback as one of the safe-haven avenues. This is especially true as Turkish lira was in a free-fall territory, nosediving as much as 11% against the dollar on Aug 13 after plummeting more than 20% on Aug 10. With this slide, the lira is down more than 40% against the dollar since the start of the year. The slump came on the back of worries about president Tayyip Erdogan's influence over monetary policy and a worsening U.S. relationship (read: 6 ETFs in Focus as Turkey Crisis Worsens).
Strong Dollar: A Boon & A Bane
A strong dollar led 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 the industrial cost and increasing the profitability and a resultant boon to the overall economy.
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, leading to lower demand and less profits. As such, companies having a higher percentage of international sales will likely underperform in a rising dollar. Moreover, commodities, emerging markets as well as gold mining stocks also get hurt by a strong dollar (read: Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).
Given this, we have highlighted ETFs that should benefit from a strengthening dollar and the ones that will lose.
ETFs to Win
Invesco DB US Dollar Index 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. The fund has so far managed an asset base of $515 million while sees an average daily volume of around 1.1 million shares. It charges 79 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares Russell 2000 (IWM - Free Report) : This ETF targets the small-cap segment of the broad U.S. stock market, charging investors 19 bps in annual fees. IWM is the most popular and liquid choice in the small-cap space with AUM of $46.4 billion and average trading volumes of around 21.2 million shares. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report) : Currency hedged ETFs win in 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. HEFA offers exposure to a wide array of Europe, Australasia, and the Far East equities while at the same time provides hedge against any fall in the foreign currencies relative to the U.S. dollar. It has amassed $3.4 billion in its asset base and trades in a good average daily volume of 841,000 shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Currency Hedged ETFs Gaining Love on Rising Dollar).
ETFs to Lose
Vanguard Mega Cap Growth ETF (MGK - Free Report) : A strong dollar has led to rough trading in blue chip companies, which derive most of their revenues from international markets. With AUM of $4 billion, this ETF offers diversified exposure to the largest growth stocks in the U.S. market. It charges 7 basis points in annual fees and trades in good volume of around 155,000 shares a day on average. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.
PowerShares DB Commodity Index Tracking Fund (DBC - Free Report) : This fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on 14 physical commodities, with heavyweights going to the energy and agriculture. The fund charges 89 bps in annual fees, while trades in a solid volume of 2.7 million shares per day. The product has managed assets of $2.5 billion.
iShares MSCI Emerging Markets ETF (EEM - Free Report) : This product offers exposure to large and mid-sized companies in emerging markets. It is the most-popular and widely traded emerging market ETF with AUM of $31.3 billion and average daily volume of more than 67.7 million shares. The fund charges 69 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook (read: EM ETFs Rebound in July: Value Trap or Value Play?).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>