The U.S. dollar is experiencing significant gains in recent weeks, logging the longest rally in years. The Bloomberg Dollar Spot Index has risen for eight consecutive weeks — the longest such run since 2005 while the ICE dollar index has been on the longest advance in nine years. The combination of surging oil prices and the speculation of high interest rates for an extended period has driven the currency higher and is likely to do at least for the near term.

Investors seeking to tap the solid trend in the greenback could consider ETFs such as Invesco DB US Dollar Index Bullish Fund UUP, WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU, iShares Russell 2000 ETF IWM, iShares U.S. Aerospace & Defense ETF ITA and iShares Currency Hedged MSCI EAFE ETF HEFA.

Rising Oil Price

A recent rise in oil prices driven by the anticipation of additional supply cuts from major oil-producing nations, Saudi Arabia and Russia, renewed fears of inflation and the longer-than-expected higher rates.

Unlike major countries in Europe and Asia, the United States exports more oil and gas than it imports, positioning the dollar to benefit from the rising energy costs. As oil prices move toward $90 a barrel, the Bloomberg Dollar Spot Index has seen a sharp rise, correlating highly with oil prices.

European economies are struggling with the increasing energy prices, with data showing minimal expansion in the euro-area economy in the recent quarter. This has raised concerns about stagflation in Europe – a mix of weak economic growth and high inflation. In contrast, the U.S. energy trade balance remains positive, suggesting that the economy would only feel the pinch of rising crude prices around $120 a barrel.

Higher Rate Bets

While growth in Europe and China has cooled down, the recent rounds of reports signal that the U.S. economy is accelerating. Activity in the services sector rose unexpectedly in August, with a strong show in new orders and employment.

The latest minutes from the Fed’s July meeting showed that “most” policymakers continued to prioritize the battle against inflation, while “some participants” cited risks to the economy from pushing rates too far. The expectation of higher rates is attracting more investments into the United States as investors seek higher rates than they can get in Europe and Asia, exerting upward pressure on the dollar.

Let’s now discuss the ETFs in detail:

UUP

Invesco DB US Dollar Index Bullish Fund is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long USD Currency Portfolio Index – Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, Invesco DB US Dollar Index Bullish Fund allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound.

The fund has managed an asset base of $548.3 million while seeing an average daily volume of around 1.3 million shares. UUP charges 77 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

USDU

WisdomTree Bloomberg U.S. Dollar Bullish Fund is another way to play the rise in the dollar directly. It offers exposure to the U.S. dollar against a basket of foreign currencies by tracking the Bloomberg Dollar Total Return Index. WisdomTree Bloomberg U.S. Dollar Bullish Fund exhibits strong negative correlations to international equity and bond portfolios.

WisdomTree Bloomberg U.S. Dollar Bullish Fund has amassed $236 million in AUM and trades in a good volume of about 279,000 shares per day on average. It charges 50 bps in annual fees.

IWM

A strong dollar provides an edge to domestic-focused companies as small caps do not have much exposure to the international market. iShares Russell 2000 ETF will benefit from a rising dollar and an improving economy. It provides exposure to a broad basket of 1,986 stocks by tracking the Russell 2000 Index, with none holding more than 0.6% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with AUM of $52.9 billion and an average trading volume of around 24 million shares.

iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

ITA

A robust dollar can be good for U.S. defense companies, which often do significant business overseas. As foreign buyers pay in dollars, a stronger dollar can mean higher revenues for these firms when those revenues are repatriated. iShares U.S. Aerospace & Defense ETF provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It holds 34 stocks in its basket with AUM of $5.4 billion and an expense ratio of 0.40%.

iShares U.S. Aerospace & Defense ETF trades in an average daily volume of around 413,000 shares. It has a Zacks ETF Rank #3 with a Medium risk outlook.

HEFA

The strength in the greenback would compel investors to recycle their portfolios into the currency-hedged ETFs. For those seeking exposure to the developed market, iShares Currency Hedged MSCI EAFE ETF could be an intriguing pick. It targets the developed international stock market in Europe, Australasia and the Far East with no currency risk. iShares Currency Hedged MSCI EAFE ETF tracks the MSCI EAFE 100% Hedged to USD Index.

The fund has AUM of $3.5 billion and trades in a solid volume of 414,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports

iShares Russell 2000 ETF (IWM): ETF Research Reports

iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports

WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports

iShares Currency Hedged MSCI EAFE ETF (HEFA): ETF Research Reports

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