Rising ETFs In A Falling Dollar Environment

The year 2015, especially the early part, was all about greenback strength, but 2016 tells a completely different story. The currency had a difficult ride in the initial part of 2016. This was because the U.S. economy has lost momentum lately with Q1 GDP expanding at an annualized rate of 0.8%, reflecting its slowest pace in a year (read: Best and Worst Performing Currency ETFs of 2015).

Against this backdrop, though the greenback managed to gain some strength in late May on April Fed minutes that pointed to interest rate hike possibilities in June, the strength proved to be short-lived. A shockingly downbeat job data for the month of May almost killed all possibilities of a hike this month (read: Dull U.S. Job Data Brighten These ETFs).

Yes, Fed chief Janet Yellen delivered a positive rhetoric on the state of the U.S. economybut waning bets over the near-term Fed rate hike made the dollar soggy. The Fed chief did not specify the timeline of the next hike in her latest speech. This happened although several other economic data points came in favorable after lacking luster in Q1 (read: Yellen Upbeat on Economy: Wining Sector ETFs).

Notably, the Fed stayed away from an aggressively policy tightening – after initiating the step in December 2015 for the first time after almost a decade – due toglobal growth worries and moderation in U.S. growth.

Meanwhile, both IMF and World Bank, while slashing global growth forecasts recently, reduced the U.S. growth forecast for the year. IMF lowered it from 2.6% to 2.4% while World Bank recently cut it from 2.7% to 1.9%. As a result, repeated hints of a not-so-brisk U.S. economy, right from the dovish Fed meeting to analysts’ estimate cuts dethroned the king dollar.

Inside Dollar ETFs

The U.S. currency ETF PowerShares DB US Dollar Bullish ETF (NYSE:UUP) (UUP) dived over 1.9% in the last five trading sessions (as of June 8, 2016). The fund is off over 5.5% so far this year (as of June 8, 2016).

Another dollar ETF WisdomTree Bloomberg US Dollar Bullish ETF (USDU) shed about 2.7% in the last five days (as of June 8, 2016) and has lost over 5.2% in the year-to-date frame (as of June 8, 2016). Though it is too early to take a call on the future movement of the greenback, and a lot is dependent on a volley of upcoming U.S. data, the dollar is less likely to be firmer in the near term.

Even if dollar regains its strength in the following trading sessions, bumps may occasionally derail its future ride. So, are there ways to profit from the falling dollar?

Short Dollar

PowerShares DB US Dollar Bearish Fund (UDN): Given the change in the market fundamentals, investors could think about shorting U.S. dollar.This fund could be the prime beneficiary of the falling USD 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 (DE:DBKGn) Short US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.

Play Commodities

PowerShares DB Commodity Index Tracking Fund (WA:DBC) : The commodity market was under pressure earlier due to dollar strength, but turned the corner this year on a weaker dollar (as commodities are mostly linked to the U.S. dollar). The rally was rife in the precious metals space while several other commodities also gained considerable strength. The fund gives broader exposure to metals, soft commodities and oil (read: Commodities Enter Bull Market: 6 ETF Winners).

Target Commodity Currency Too

WisdomTree Commodity Currency Strategy Fund CCX: This fund seeks to achieve total returns reflective both money market rates in select commodity-producing countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar (see: all currency ETFs here).

With this approach, investors can embark on several economies around the world. The product invests in eight currencies – Australian Dollar, Brazilian Real, Canadian Dollar, Chilean Peso, Norwegian Krone, New Zealand Dollar, Russian Ruble, and South African Rand – almost in equal proportions.

Buy Large-Cap U.S. ETFs

Vanguard Large-Cap ETF (V:VV) : Notably, large cap stocks have heavier foreign market exposure and are thus hit by a stronger dollar while these are likely to outperform if the U.S. dollar falls. However, investors should play this area cautiously as global growth worries may pose threats to large-cap investing. VV provides a way to track the performance of a diversified group of stocks of large U.S. companies.

Turn to Emerging Markets?

iShares Core MSCI Emerging Markets ETF IEMG: As the greenback turns soft, emerging market securities get a boost. Possibilities of a few more days of cheap dollar inflows are likely to brighten these stocks. Investors can play this trend with IEMG.