Bearish On Bucks? Try This ETF

With the Federal Reserve opting to preserve its zero interest rate policy (ZIRP) on Thursday, the Powershares DB US Dollar Index Bullish Fund UUP, the U.S. Dollar Index tracking ETF, fell more than one percent.

UUP is now off nearly three percent over the past month and has seen its year-to-date gain trimmed to 2.7 percent. With the strong dollar being a frequently cited excuse for disappointing earnings from an array of companies in a plethora of sectors, some market gurus are surmising that the Fed does not want the dollar to further strengthen. 

The Fed proved once again yesterday trying to glean when it will raise interest, likely bolstering the dollar in the process, is a fool's errand. However, there are ways for investors to make a bet on prolonged weakness in the greenback that do not involve tapping the volatile foreign currency market.

Consider the WisdomTree Weak Dollar U.S. Equity Fund USWD, which debuted alongside its strong dollar counterpart, the WisdomTree Strong Dollar U.S. Equity Fund UUSD. As their names imply, USWD and UUSD are equity-based ETFs designed to give investors exposure to stocks and sectors that thrive in strong and weak dollar environments. 

USWD's underlying index “includes only firms that derive at least 40% of their revenues from exports. These firms tend to be more impacted by a strong-dollar environment, as they are focused on selling their goods and services abroad. Similarly, during a weak-dollar period, we’d expect these firms to become more competitive in selling their goods abroad. The Index also tilts weight to stocks whose returns are more negatively correlated (or have a lower correlation) to the returns of the U.S. dollar,” according to a new note from WisdomTree Research Director Jeremy Schwartz. 

Thinking about the companies that often bemoan the strong dollar, many are large- and mega-cap firms that are major components of widely followed benchmarks, such as the Dow Jones Industrial Average. In fact, six of USWD's top 10 holdings are Dow components, including Apple Inc. AAPL, Johnson & Johnson JNJ and Pfizer Inc. PFE. Technology and health care stocks combine for 44.4 percent of USWD's weight. 

A notable attribute to USWD is the ETF's heavy allocation to cyclical sectors, groups that often perform well after interest rates rise. For example, technology, industrial and consumer discretionary names combine for over 51 percent of the ETF's weight, which could actually work in USWD's favor if Fed liftoff comes to pass.

“In the U.S., we have also seen U.S. dollar strength impact stocks that are exposed to sales in foreign markets. It is widely known that a significant percentage of the revenues of U.S. companies in the S&P 500 Index comes from abroad. If the U.S. dollar continues to strengthen, this is likely to provide continued headwind for the companies with meaningful revenue from and business exposure in foreign markets. By contrast, if the U.S. dollar reverses, these firms should benefit,” adds Schwartz.