Weakening US Dollar Puts Spotlight on These ETFs

Weakening US Dollar Puts Spotlight on These ETFs

How ETF investors can prepare for the continuing decline in the U.S. currency.

Reviewed by: Lisa Barr
Edited by: Daria Solovieva

The plight of the U.S. dollar has been increasingly on investors’ minds lately.  

The U.S. Dollar Index has been on a generally upward trajectory since 2012. After peaking around the 110 level last year, it has dipped toward 102. The reversal of some of the dollar’s recent headwinds makes this a good time to identify alternatives to profit from continued weakness in the U.S. greenback.  

The dollar rose sharply in 2021 and 2022, as the euro grappled with the outbreak of war in Ukraine, and China’s restrictive policies to control the spread of COVID-19 limited that region’s economic growth. When the Fed raised interest rates throughout 2022 and into 2023, it further distinguished the dollar from other currencies, as those higher rates drew more wealth to the U.S. currency.  

While being the world’s reserve currency naturally provides a tailwind to the dollar, a combination of factors are starting to accumulate to potentially reverse that fortune. The immediate challenge is suddenly falling U.S. interest rates.  

The benchmark 10-year U.S. Treasury bond yield reversed its early 2023 move in a matter of four weeks, plunging from 4.0% to 3.3% in March and early April.  

Plus, there is the growing drumbeat of antidollar factions. Those include advocates of “decentralized finance,” which challenges the dominance of fiat currencies like the dollar, with cryptocurrencies using blockchain technology instead of traditional hard currency.  

Also, as the Financial Times reported recently, the BRICS countries of Brazil, Russia, India, China and South Africa see a “growing clamor to challenge the dollar’s hegemony.” 

While none of these events is likely to supplant the dollar soon, that doesn’t preclude further unwinding of its strong run of the past few years. That prompts ETF investors to get more familiar with what they can do to capitalize on this trend. Here are a few considerations. 

Invesco DB U.S. Dollar Index Bearish (UDN) 

Perhaps nothing tells the story of the Dollar’s long-term ascent versus other major currencies than the fact that this ETF has a mere $85 million in assets. UDN’s mirror-image, Invesco DB U.S. Dollar Index Bullish Fund (UUP), has just over $1 billion in assets. UDN aims to deliver the opposite of the U.S. Dollar index (USDX) via swap contracts. That index contains six currencies, with the euro accounting for more than half. The British pound, Canadian dollar and Japanese yen are next in allocation size, and the Swiss franc and Swedish krona round out the index. UDN has traded since 2007. 

iShares International Treasury Bond ETF (IGOV) 

One way to express a bearish U.S. dollar view is to invest in bonds denominated in nondollar currencies. That's what IGOV does. These bonds are issued by governments, not international corporations, and more than 90% of this ETF’s current holdings are rated between AAA and A. About 65% of IGOV is invested in bonds maturing in between one and 10 years, with the rest in longer maturities. 

iShares International Select Dividend ETF (IDV) 

While bond yields are up around the globe, this ETF that invests in nondollar equity markets sports a 12-month trailing yield of about 6.5%. That’s its highest mark in 14 years, except for a brief moment during the pandemic market shock in early 2020. IDV is based on an index that tracks the performance of 100 high-dividend-paying companies in the EPAC (Europe, the Pacific, Asia and Canada) region. 

So, whether an investor considers the currency, bond or equity route to participate in a potential decline of the U.S. dollar, the ETF market offers compelling choices for investors. 

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.