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How King Dollar May Plague These ETFs

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Not that long ago, many so-called experts, pundits, and traders speculated that the U.S. dollar would lose its reserve currency status. The dollar appeared to be on its way to more declines against its major rivals amid the loss of the prestigious AAA credit rating, rising deficits, and no legitimate plans to deal with entitlement spending.

The combination of gold losing its safe haven status, Japan being in perhaps a worse fiscal situation than the U.S., and Europe's worsening sovereign debt crisis have helped resurrect the dollar, bolstering its reserve currency status in the process. 

A strong dollar has its advantages, particularly for consumers and tourists that are traveling internationally. Conversely, a rejuvenated greenback also claims plenty of victims in the financial markets. With the dollar looking poised to extend its bull run, some ETFs could be in more for pain at the hands of King Dollar. What's really important is that we're talking about more than just gold and oil funds.

Consumer Discretionary SPDR (NYSE: XLY): The Consumer Discretionary SPDR would be a viable alternative, as an ETF that can stave the impact of a stronger dollar if the U.S. economy can really gain steam. That's a big "if," though. Half of XLY's top-10 holdings can easily be adversely affected by a strong dollar. 

McDonald's (NYSE: MCD), the ETF's largest holding, is facing the double whammy of slowing global sales and a stronger buck. Walt Disney (NYSE: DIS), Starbucks (NASDAQ: SBUX), Ford (NYSE: F), and Nike (NYSE: NKE) all have some degree of currency risk. These five stocks account for 22% of XLY's weight.

As if that's not bad enough, XLY has smaller weights to high-end discretionary names such as Ralph Lauren (NYSE: RL), Coach (NYSE: COH), and Tiffany & Co. (NYSE: TIF) that are vulnerable to a slowing global economy and a stronger dollar.

iShares MSCI Canada Index Fund (NYSE: EWC):

This is a perception play. Canada is the largest exporter of oil to the U.S., but energy stocks aren't the largest sector allocation in EWC. Financials are - but energy names are prominent at 26.3% of Canada's largest fund's overall weight. Regarding the greenback and the loonie (the Canadian dollar), the inverse correlation has been almost perfect in the past month. UUP is 2.43%, while the CurrencyShares Canadian Dollar Trust (NYSE: FXC) is down 2.49%. Over the same time, EWC has dropped 4.4%.

Market Vectors Brazil Small Cap ETF (NYSE: BRF): With the WisdomTree Dreyfus Brazilian Real ETF (NYSE: BZF) down almost 5% in the past month, nearly any ETF tracking the export-driven Brazil would be suitable for this list. The U.S. is Brazil's second-largest trading partner behind China; so, in theory, the weaker real should be helping Brazil ETFs. 

That hasn't been the case, as the plunging real has weighed on BRF - 47% of its fund is allocated to discretionary and industrial names. Traders have shown that when they deport exotic currencies such as the real, they head to the dollar. Short real/long dollar is a problem for Brazil equity funds. It's that simple.

Materials Select Sector SPDR (NYSE: XLB): Materials stocks are an obvious strong dollar victim. XLB's constituents are primarily American companies, but they garner healthy revenue percentages overseas. In other words - a weak dollar is a catalyst for materials stocks, just as it is for the futures prices of many of the commodities that these companies produce. 

With Freeport McMoRan Copper & Gold (NYSE: FCX) and Newmont Mining (NYSE: NEM) among its top-10 holdings, metals and mining names account for almost 23% of XLB's weight. That's enough enough to validate XLB as a strong dollar play... from the short side.

For more on ETFs with ties to the U.S. dollar, please click here.

Posted-In: Long Ideas Sector ETFs Short Ideas Emerging Market ETFs Commodities Currency ETFs Forex Global Best of Benzinga

 

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