Betting On A Rising Dollar With ETFs

January 07, 2016

Broad Dollar Exposure

Assuming the dollar continues to ascend, there are a number of ways investors can profit using exchange-traded funds.

The largest and most liquid long-dollar fund out there is the PowerShares DB US Dollar Index Bullish ETF (UUP | B-73), which goes long the greenback against rivals such as the euro, yen, pound and a few others. UUP has a relatively hefty 0.74% expense ratio, but even so, managed to return 7% last year.

A competing product is the cheaper WisdomTree Bloomberg US Dollar Bullish ETF (USDU), with a 0.50% expense ratio. USDU goes long the dollar against a basket of currencies that's broader than that of UUP and includes the Chinese yuan and Mexican peso. The lower expense ratio and broader approach helped the fund outperform in 2015, with a return of 7.6%.

2015 Returns For UUP, USDU

UUP and USDU are the only ETFs that provide long exposure to the dollar against a basket of currencies.

Leveraged Funds

Another popular fund is the UltraShort Euro ETF (EUO), which provides 2x leveraged short exposure on the euro relative to the dollar. EUO is the second-most-popular currency ETF, with more than $525 million in assets. Even with its chunky 0.93% expense ratio, the fund delivered an 18.1% return last year.

The UltraShort Yen ETF (YCS) also provides leveraged short exposure, but to the Japanese yen. It didn't fare as well in 2015, with its 1.6% loss, but it did extremely well in 2014, with a 26% gain. If John Mauldin is right about the dollar potentially climbing to 200 against the yen in the future, YCS could be a big winner.

Unfortunately, there are no ETFs that go long the U.S. dollar against emerging market currencies. There are a host of funds that take the opposite approach—going short the dollar against emerging market currencies, but that's obviously a strategy that has done abysmally recently.

For example, the WisdomTree Brazilian Real ETF (BZF | C-91) tanked 25.6% last year, while the WisdomTree Emerging Currency ETF (CEW | C-45) lost 9.6%.

Daring investors could opt to short those ETFs, which would effectively be like going long the dollar against those respective currencies.

2015 Returns For EUO, UCS, BZF, CEW

Currency Hedging

ETFs like those mentioned above are the simplest, most straightforward vehicles to go long the dollar. But there are other ways to make a bet on the dollar indirectly.

Currency-hedged ETFs, such as one of 2015's most popular fund, the WisdomTree Europe Hedged Equity ETF (HEDJ | B-49), give investors the ability to pair their long exposure on a certain segment of the market with a currency bet.

In the case of HEDJ, investors receive exposure to eurozone stocks and short euro (long dollar) exposure. The short-euro position offsets the inherent long-euro exposure of owning eurozone stocks; hence why these are called "currency hedged" ETFs.

For U.S. investors betting on a rising buck, currency-hedged ETFs are the superior option compared with their plain-vanilla counterparts. However, they are far from pure-play bets on the currency market and should not be treated as such.

Contact Sumit Roy at [email protected].

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