ETFs
Profit from these ETFs thanks to the strength of the dollar
The US dollar has been rising for several weeks. This is now his longest weekly winning streak since February. The Bloomberg dollar gauge rose to its highest level in more than a month after a stronger jobs report dampened hopes for a rate cut.
Investors looking to take advantage of this trend might consider ETFs such as invesco DB US Dollar Index Bullish Fund UUP, US Dollar Bull Fund WisdomTree Bloomberg USDU, iShares Russell 2000 ETF IWM, iShares US Aerospace & Defense ETF ITA and iShares MSCI EAFE Currency Hedged ETF HEFA.
The latest jobs data reflects the strength of the U.S. economy, reducing expectations of a rate cut. U.S. job growth jumped in May and wage growth accelerated. The economy added 272,000 jobs in May, above Bloomberg’s expectations of 185,000 jobs, reflecting continued strong hiring across a range of sectors. Health care and social assistance led job gains with 83,000. Leisure and hospitality, which includes restaurants and bars, added 42,000 jobs, while professional and business services added created 33,000 jobs. The public sector, which added only 7,000 positions in April, rebounded with 43,000 gains.
Wage growth rose for the first time in months, even as the unemployment rate rose to 4% from 3.9%, its highest level since January 2022. Traders no longer expect a rate cut until December.
A strong dollar attracts foreign capital from investors seeking dollar-denominated returns, providing an advantage to domestically focused companies. Additionally, the cost of energy in the United States falls with a stronger dollar, which reduces industrial costs, increases profitability, and propels the economy as a whole.
Now let’s talk about ETFs in detail:
UUP
The Invesco DB US Dollar Index Bullish Fund is the main beneficiary of the rising dollar as it provides exposure to a basket of six global currencies. This is done by tracking the Deutsche Bank Long USD Currency Portfolio Index – Excess Return plus interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, the Invesco DB US Dollar Index Bullish Fund allocates almost 57.6% to Euro and 25.5% collectively to Japanese Yen and British Pound.
The fund managed an asset base of $438.7 million while recording an average daily volume of approximately 728,000 shares. UUP charges 78 basis points in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium Risk Outlook (Read: Metals and Mining ETFs at 52-Week High: Here’s Why).
USDU
The WisdomTree Bloomberg US Dollar Bullish Fund is another way to play directly on the rise of the dollar. It provides exposure to the U.S. dollar against a basket of foreign currencies by tracking the Bloomberg Dollar Total Return Index. The WisdomTree Bloomberg US Dollar Bullish Fund has strong negative correlations with international stock and bond portfolios.
The WisdomTree Bloomberg US Dollar Bullish Fund has amassed $280.8 million in assets under management and trades a good volume of around 242,000 shares per day on average. It charges a 50 basis point annual fee.
IWM
A strong dollar gives domestically focused companies an advantage, as small caps don’t have much exposure to the international market. The iShares Russell 2000 ETF will benefit from the rising dollar. It provides exposure to a broad basket of 1,937 stocks tracking the Russell 2000 index, with no one holding more than 1.5% of assets. The iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with $60.9 billion in assets under management and an average trading volume of approximately 27 million shares ( read: Harnessing the Power of Utilities and Small Caps with These ETFs).
The iShares Russell 2000 ETF charges 19 basis points in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium Risk Outlook.
ITA
A strong dollar can be beneficial for U.S. defense companies, which often do significant business overseas. Since foreign buyers pay in dollars, a stronger dollar can mean higher revenues for these companies when those revenues are repatriated. The iShares US Aerospace & Defense ETF provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones US Select Aerospace & Defense Index. He holds 34 stocks in his basket with assets under management of $6.4 billion and an expense ratio of 0.40%.
The iShares US Aerospace & Defense ETF trades with an average daily volume of approximately 429,000 shares. It has a Zacks Ranked #2 ETF with a Medium Risk Outlook (Read: 5 Top Ranked Sector ETFs to Buy in June).
HEFA
The strength of the greenback would force investors to recycle their portfolios into currency-hedged ETFs. Indeed, a strong greenback eats into foreign investment gains when repatriated into U.S. dollars, pushing them into the red even when international stocks perform well. For those looking for exposure to the developed market, HEFA could be an interesting choice. It targets the developed international stock market in Europe, Australasia and the Far East without foreign exchange risk. The iShares Currency Hedged MSCI EAFE ETF tracks the 100% USD-hedged MSCI EAFE Index.
The fund has $7 billion in assets under management and trades a solid volume of 901,000 shares. HEFA charges 35 basis points in fees per year to investors and has a Zacks ETF Rank #3 with a Medium Risk Outlook.
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Bullish Invesco DB US Dollar Index ETF (UUP): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
iShares US Aerospace & Defense ETF (ITA): ETF Research Reports
WisdomTree Bloomberg US Dollar Bull ETF (USDU): ETF Research Reports
iShares MSCI EAFE Currency Hedged ETF (HEFA): ETF Research Reports