The U.S. dollar has been on the rise since Donald Trump’s big win last week. It surged to a one-year high against a basket of currencies (read: ETFs Set to Soar on Trump's Presidential Victory).
Trump's policies on restricting illegal immigration, enacting new tariffs, lowering taxes and reducing regulations may boost the economy and inflation, thereby limiting the Federal Reserve's ability to cut rates, which is a positive for dollar. Additionally, the anticipation of increased deficit spending has propelled Treasury yields, offering further support to the dollar.
Strong Dollar: A Boon & A Bane
A strong dollar will lead 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 industrial costs, increasing profits and propelling 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, inducing lower demand and profits. Companies with a higher percentage of international sales will likely underperform in a rising dollar environment. Moreover, commodities, emerging markets and gold mining stocks are hurt by a strong dollar.
Against this backdrop, we highlighted ETFs that should benefit from a strong dollar and those that will lose.
ETFs to Gain
Invesco DB US Dollar Index Bullish Fund (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 managed an asset base of $304.3 million, with an average daily volume of around 683,000 shares. UUP charges 78 bps of annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares Russell 2000 ETF (IWM)
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 1,972 stocks by tracking the Russell 2000 Index. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with an AUM of $78.9 billion and an average trading volume of 23.4 million shares (read: Top ETF Winners from the Trump Trade).
iShares Russell 2000 ETF charges 19 bps of annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares Currency Hedged MSCI EAFE ETF (HEFA)
A strong greenback will 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 an AUM of $5.4 billion and trades in a solid volume of 776,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.
ETFs to Lose
Vanguard Mega Cap Growth ETF (MGK)
A strong dollar led to rough trading in blue chip companies, which derive most of their revenues from international markets. With an AUM of $24 billion, Vanguard Mega Cap Growth ETF offers diversified exposure to 71 largest growth stocks in the U.S. market. It follows the CRSP US Mega Cap Growth Index.
Vanguard Mega Cap Growth ETF charges 7 basis points as annual fees and trades in a good volume of around 285,000 shares a day, on average. The fund has a Zacks ETF Rank #2 with a Medium risk outlook.
Invesco DB Commodity Index Tracking Fund (DBC)
Invesco DB Commodity Index Tracking Fund follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return, composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world.
With an AUM of $1.4 billion, Invesco DB Commodity Index Tracking Fund trades in a volume of 853,000 shares per day, on average, and charges 87 bps of annual fees.
iShares MSCI Emerging Markets ETF (EEM)
A strengthening dollar leads to pulling out capital from these markets, stirring up trouble for most emerging nations. iShares MSCI Emerging Markets ETF offers exposure to large and mid-sized companies in the emerging markets and follows the MSCI Emerging Markets Index. iShares MSCI Emerging Markets ETF holds 1,211 securities, with Chinese firms making up for 27.4% of the portfolio, while Taiwan, India and South Korea round off the next three spots with a double-digit exposure each.
iShares MSCI Emerging Markets ETF charges 70 bps of annual fees and trades in an average daily volume of 30 million shares. EEM has an AUM of $18.3 billion and a Zacks ETF Rank #3 with a Medium risk outlook.
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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
Invesco DB Commodity Index Tracking ETF (DBC): ETF Research Reports
iShares Currency Hedged MSCI EAFE ETF (HEFA): ETF Research Reports
Vanguard Mega Cap Growth ETF (MGK): ETF Research Reports
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