An Active ETF For A Dollar Rally

Thanks in large part to the recent Brexit decision, the U.S. Dollar Index is higher by more than 2 percent over the past month. Whether that turns into a more lasting rally for the greenback remains to be seen, but investors have options when it comes to playing a dollar rebound via exchange-traded funds.

One of the more compelling long dollar options among currency ETFs is the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU. USDU, an actively managed ETF, is higher by nearly a quarter of a percent over the past month. As an actively managed ETF, USDU offers some advantages relative to traditional U.S. Dollar Index tracking ETFs, which are married to only tracking the greenback against the the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

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“After consolidating for nearly six months, we believe dollar strength is likely to resume post-Brexit. While our primary thesis was that the dollar could continue to be strong because of divergence in monetary policies, the focus has now shifted to sentiment and economics. As a store of value, the British pound as well as the euro have seen their prospects decline as a result of Brexit. While it is still far too early to know if this decline will be contained as a regional issue or if it sets off a chain reaction, we believe the balance of risks favors being long the U.S. dollar against a broad basket of global currencies,” said WisdomTree in a note out Tuesday.

Currency In Focus

Not surprisingly, much of the currency world's focus these days is on the British pound, which was recently spotted at three-decade lows against the dollar. USDU is more than adequately levered to sterling weakness as a short pound position accounts for more than 9 percent of the ETF's weight. That could be enough to spell near-term upside for USDU.

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“While British politicians likely don’t know the next step forward at this moment, investors appear to be uninterested in waiting to find out. The violent shocks to the pound we’ve seen over the last several days point to an increased likelihood of capital flight or at least a dramatic decrease in local investment demand. Additionally, with a cloud of uncertainty hanging over any future negotiations with the EU, assigning a new fair value to the pound will be difficult,” added WisdomTree.

While short euro and yen positions combine for about half of USDU's weight, the ETF is levered to other currently challenged currencies. For example, a short Aussie dollar position is 6.1 percent of USDU's weight, a potential advantage at a time when global investors widely expect the Reserve Bank of Australia to cut interest rates again.