Inside U.S. Dollar ETFs: Will the Run Continue? - ETF News And Commentary

The U.S. stock market is currently hovering near all-time highs and continues to climb on the back of improving domestic fundamentals. Generally, when the stock market surges, the U.S. dollar struggle but the trend has apparently reversed again like last year. Both the U.S. market and the dollar have moved in the same direction in recent weeks.

The dollar has been surging against the basket of major currencies on a flurry of upbeat U.S. economic data, escalating tensions in Ukraine, diverging central bank policies around the world and the possibility of a U.S. interest rate hike sooner than expected. In particular, a rise in interest rates will pull in more capital flows into the U.S. and lead to further appreciation of the dollar, though the Fed maintained its dovish tone in its latest meeting minutes (read:

).

The activity is picking up faster in the U.S. economy, building up momentum for the rest of the year. The economy expanded at a solid pace of 4.2% in the second quarter, suggesting a strong rebound from the steep contraction recorded in the first quarter. The job market is showing clear signs of strengthening with jobless claims near the lowest levels since 2007.

After being stalled in the first quarter, the housing market is also back on the recovery path driven by firming home prices, rising demand, lower mortgage rates and increase in housing inventory. Oil prices appear to have stabilized (read:

).

The manufacturing activity expanded to highest level since April 2010 last month, as depicted by Markit's US Manufacturing Purchasing Managers' Index (PMI), which rose to 57.9 in August from 55.8 in July on higher production, new orders and rising payroll numbers. Further, the recent consumer sentiment survey has been extremely positive with the monthly Consumer Confidence Index, measured by the Conference Board, climbing to the highest level in seven years to 92.4 in August from the revised 90.3 in July.

Beyond the domestic front, the sliding euro and yen are propelling the dollar higher. Euro has suffered from heavy sell-off in recent sessions amid growing hopes for fresh stimulus by the European Central Bank to shore up growth and inflation. Further, sluggish data from China and Japan are diverting investors' attention to the U.S., injecting optimism into the U.S. currency (read:

).

The strengthening economic fundamentals confirm the bullish trend in the greenback at least for the short term. Investors seeking to make a play on the U.S. dollar could consider any of the following ETFs:

This fund could be the prime beneficiary of the rising dollar as it offers exposure against a basket of world currencies. These include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund's holdings of U.S. Treasury securities.

In terms of holdings, UUP allocates nearly 58% in euro while 25% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $843.6 million while sees an average daily volume of 670,000 shares. It charges 80 bps in total fees and expenses. This dollar ETF added 2.3% in the year-to-date time frame and has a Zacks ETF Rank of 2 or ‘Buy' rating with medium risk outlook.

This ETF is the newest play in the dollar space and has amassed $55.1 million since its debut eight and half months ago. Volume is light as it exchanges nearly 10,000 shares a day on average. The fund charges 50% in expense ratio. The product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index (see:

).

The fund allocates higher to the Euro zone currency at 31.3%, closely followed by Japanese Yen (18.9%) and Canadian dollars (11.6%). Other currencies like Mexican Peso, British Pound, Australian dollar, Swiss franc, South Korean Won, Chinese Yuan and Brazilian Real receive single-digit allocation in the fund's basket. USDU is down 0.08% so far this year.

These U.S. dollar ETFs could be worthwhile and continue their rally given stronger domestic economy, uncertainty in other developed and emerging markets, and increasing consumer confidence.

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