Three Nifty Strong Dollar ETF Plays
Speculation that the Federal Reserve will soon begin tapering its quantitative easing program, which by some accounts could start in September, has been good news for the U.S. dollar.
It was not long ago that the term "king dollar" was more snark than reality as riskier currencies such as the Australian dollar and even the embattled euro traded higher against the greenback.
Helped by the Fed, the greenback has changed its ways as the PowerShares DB US Dollar Index Bullish (NYSE: UUP), the tracking ETF for the U.S. Dollar Index, has gained 3.5 percent in the past month. With expectations in place that a tapering announcement will arrive following the Fed's September meeting, the dollar could have more upside ahead of it.
UBS thinks so. The bank is forecasting year end targets of EUR/USD 1.20, USD/JPY 1.10 and GBP/USD 1.41, according to WisdomTree. And that does not include the fact that if AUD/USD falls below 90 cents, the Aussie could easily lose another 10 percent from there.
In addition to UUP, an obviously valid and worthy play, investors should consider some equity-based ETFs, including some new funds, as avenues for profiting from King Dollar's resurgence.
WisdomTree United Kingdom Hedged Equity Fund (NYSE: DXPS)
Some investors have reservations about new ETFs and the newer the fund, the more trepidation investors seems to have. That is understandable, but rarely if ever backed by empirical evidence that justifies those feelings. We could get into a plethora of facts regarding the WisdomTree United Kingdom Hedged Equity Fund, the first ETF to hedge GBP/USD fluctuations, such as fees (0.48 percent per year), holdings (plenty of staples, banks and oil names).
However, this is why DXPS is worth a look and a worth a look now, not next week or next month or after the crowd has poured $100 million into the ETF: The U.K. economy is, finally, showing signs of improvement and it is widely expected that the Bank of England will add to its stimulus program.
Assuming sterling continues to fall, investors can either short the CurrencyShares British Pound Sterling Trust (NYSE: FXB), a risky proposition, or profit rising U.K. stocks with DXPS.
WisdomTree Japan Hedged SmallCap Equity Fund (NYSE: DXPS)
Another new ETF, but DXPS has the advantages of being known as the small-cap equivalent of the highly popular WisdomTree Japan Hedged Equity Fund (NYSE: DXJ). It was noted on Tuesday that Japan ETFs benefit when U.S. interest rates rise.
WisdomTree Research Director Jeremy Schwartz confirms the potential for that scenario to play out.
"On June 25, 10-year JGB yields were 0.87%, while 10-year U.S. yields had reached 2.58%.3 The wider interest rate difference may encourage Japanese investors to start buying U.S. Treasuries, causing more pressure on the yen," he said in a new research note.
ProShares UltraShort Australian Dollar (NYSE: CROC)
Even with Tuesday's 0.6 percent gain, the CurrencyShares Australian Dollar Trust (NYSE: FXA) is down 12.3 percent in the past 90 days. The Australian dollar is the second-worst performing developed market currency in the world this year behind the yen. Strong U.S. data has pressured the Aussie and the cooling Australian economy means it is probable that the Reserve Bank of Australia lowers rates again (already at a record low of 2.75 percent) later this year.
CROC does not grab a lot of press, but consider this: The ETF had just $3.69 million in assets at the end of the first quarter. Since the start of the second quarter, CROC has gained nearly $16.4 million in assets, according to Index Universe data.
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