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This ETF Is Begging Yellen To Raise Interest Rates

October 5, 2015 7:27 am
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Fed funds futures indicate that a dearth of a traders expect the Federal Reserve to raise interest rates this month. Same goes for December and the reality is, traders are not exactly tripping over themselves to make bets the central bank boosts borrowing costs early next year, either.

On the other hand, recent price action in the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the U.S. dollar index tracking exchange traded fund, has heartened dollar bulls. Since September 17, the day the Fed decline to raise interest rates, UUP has climbed 1.1 percent. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU), an actively managed rival to UUP, is higher by nearly 1 percent over the same period.

Investors looking to play the dollar's resumed ascent via equities have an interesting option in the newly minted WisdomTree Strong Dollar U.S. Equity Fund (NYSE: USSD). USSD, which debuted in July, tracks the WisdomTree Strong Dollar U.S. Equity Index (WTUSSD). That index is a collection of companies that derive at least percent of their sales from inside the US.

Related Link: Yellen: Fed Doesn't React To Markets, Forgets Her Own Social Media Valuations Warning

Despite its rookie status, USSD merits consideration, particularly by investors betting the dollar's ascent is merely in the middle innings and that the Fed will raise rates this year and next year. If those scenarios become reality, equity portfolios with significant exposure to large- and mega-cap companies that generate substantial portions of their revenue overseas could be vulnerable.

“In a rising U.S. dollar scenario, multinational companies that have more global sales exposure would not only lose on translating sales and profits earned overseas back into dollars, but secularly they’d become less competitive in the global markets, as their goods and services become more expensive to international consumers,” said WisdomTree Research Director Jeremy Schwartz in a recent note.

While USSD's weak dollar counterpart, the WisdomTree Weak Dollar U.S. Equity Fund (NYSE: USWD), allocates nearly 52 percent of its weight to the technology, industrial and consumer discretionary sectors, those dollar-sensitive groups combine for just over 36 percent of USSD's weight.

“The trend in factor-based or so-called “smart beta” investment strategies has focused on common factors such as value, quality, momentum and low volatility. WisdomTree believes currency can also be a critical factor explaining various market returns, even within the U.S. markets. While the real time results are relatively new—as just about four months of performance exist with these indexes being live—we are witnessing a wide divergence in the returns between the strong and weak dollar strategies,” adds Schwartz.

For those that believe the Fed raising rates will illicit a rally in the financial services sector, USSD becomes an even more compelling idea because the ETF allocates 24.6 percent of its weight to that sector, making financials USSD's largest sector allocation by 400 basis points. Three of the ETF's top 20 holdings are financial services names.

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