Strong Dollar Defense And Rewards With This ETF

Various data points suggest that some sectors and market capitalization spectrums are more sensitive to a stronger dollar than others. Recent performance confirms the notion that small-caps are better bets during strong dollar environments than large-caps.

For the 90-day period ended May 31, the PowerShares DB U.S. Dollar Index Bullish Fund UUP gained 4.9 percent while the S&P 500 added 1.6 percent. The S&P 500's gain over that stretch pales in comparison to the 8.8 percent returned by the Russell 2000 Index,the widely followed small-cap benchmark.

What Happened

Plenty of other small-cap exchange-traded funds have recently been surging alongside the dollar, including some dividend strategies. The WisdomTree U.S. SmallCap Dividend Fund DES is higher by nearly 8 percent for the three months ended May 31. The $2.08 billion DES tracks the dividend-weighted WisdomTree U.S. SmallCap Dividend Index (WTSDI).

DES turns 12 years old later this month, a milestone its underlying index hit at the end of May, so there's plenty of data to measure the fund's performance in various strong dollar environments. Historically, DES and its index have outperformed the S&P 500 and the Russell 2000 as the dollar strengthens.

Why It's Important

Historical data confirm DES and its index do benefit from a stronger dollar.

“The last time the market experienced a strengthening U.S. dollar was from the middle of 2014 through the end of 2016, with DXY appreciating 10.12 percent annually,” said WisdomTree in a recent note. “During this period, the WisdomTree SmallCap Dividend and Earnings Indexes outperformed the S&P 500 Index, which rose 7.70% on an annual basis, by 264 and 51 basis points (bps), respectively. WTSDI and WTSEI also outperformed the Russell 2000 Index by 356 and 143 bps annually, respectively.”

Like many small-cap strategies, DES is more domestically focused. The ETF allocates nearly 21 percent of its weight to consumer discretionary stocks and over 17 percent to industrials.

What's Next

“After depreciating in 2017, the dollar recently has reversed this trend and rallied more than 5 percent since February,” said WisdomTree.

DES is usually less volatile than non-dividend small-cap counterparts and its index yields 3.76 percent, which is nearly triple the yield on the Russell 2000.

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