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The U.S. dollar against the basket of other currencies has been gaining momentum in recent months on its safe-haven status. Rising fears of a global recession and Fed’s aggressive tightening policy have raised the appeal for greenback as a safe-haven play (see: all the Currency ETFs here).
Investors seeking to make a play from this trend could consider ETFs such as Invesco DB US Dollar Index Bullish Fund UUP, WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU, iShares Russell 2000 ETF IWM and iShares Currency Hedged MSCI EAFE ETF HEFA.
Persistently high inflation and an economic downturn caused by a hawkish Fed have made investors jittery and lifted the safe bets. Russia’s invasion of Ukraine added to the chaos. Additionally, the World Bank has warned of a recession, citing the war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation.
The Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest interest-rate increase since 1994 — and signaled continued tightening ahead. The central bank is on pace to hike rates again this month by another 75 basis points, as tracked by the CME's Fed Watch Tool (read: Top ETF Stories of First-Half 2022).
The move is expected to pull in more capital into the country and lead to an appreciation of the U.S. dollar. A strong dollar attracts foreign money from investors seeking dollar-denominated returns, providing an edge to the domestic-focused companies. Further, energy cost in America decreases with a stronger dollar, thereby lowering industrial cost, increasing profitability and propelling the overall economy.
Further, the euro dropped to a near two-decade low against the dollar amid fears that a recession in the eurozone could be looming, with gas prices soaring and no signs of the Russia-Ukraine war abating.
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 (read: U.S. Dollar ETF Hits New 52-Week High).
The fund has managed an asset base of $1.7 billion while seeing an average daily volume of around 3 million shares. UUP charges 78 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 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 $297.4 million in AUM and trades in a lower volume of about 553,000 shares per day on average. It charges 50 bps in annual fees.
A strong dollar provides an edge to the 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 1,985 stocks by tracking the Russell 2000 Index, with none holding more than 0.4% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with AUM of $51.4 billion and an average trading volume of around 30.8 million shares (read: 6 Reasons Why You Should Tap 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 1 million 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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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports
iShares Currency Hedged MSCI EAFE ETF (HEFA): ETF Research Reports
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