Strong Dollar's Ripple Effect: What It Means For S&P 500 ETFs

On Monday, the greenback climbed to its highest levels in over two years. Investors in ETFs tracking the S&P 500, such as the SPDR S&P 500 ETF Trust SPY, Vanguard S&P 500 ETF VOO, and iShares Core S&P 500 ETF IVV, might be wondering: What does this mean for my portfolio?

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A Strong Dollar's Impact On Earnings

When the dollar strengthens, U.S. multinational companies with significant foreign revenue face headwinds. This is because their international earnings must be converted back into dollars, often causing erosion in revenue growth. Roughly 30% of the S&P 500’s revenues come from overseas, leaving the index moderately exposed to this trend, according to Goldman Sachs' Chief U.S. Equity Strategist David Kostin, as cited by Business Insider.

During the upcoming earnings season, Kostin predicts fewer companies will beat consensus sales forecasts. However, let’s dig deeper to see if that will be a hindrance for ETFs carrying stocks of those companies in their portfolios.

ETFs Tracking S&P 500 Index In A Strong Dollar Environment

According to another Business Insider report, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson said that a soaring dollar increases earnings dispersion. In other words, companies less dependent on foreign sales are better positioned to weather currency storms, while those with high overseas exposure, especially large caps, might struggle.

Wilson noted that thanks to the lower exposure of the S&P 500 Index to foreign revenue exposure, the dollar’s impact on index-level earnings is relatively muted. However, sector-specific outcomes will vary, he said. Sectors with the highest foreign exposure are, according to Wilson, household products, food and beverage, and technology hardware. For ETFs tracking the broad S&P 500 index, although diversification can mitigate the impact of a strong dollar, the exposure to large-cap S&P 500 stocks, especially tech stocks, can be a risk to performance.

For instance, companies like Apple and Microsoft generate significant overseas revenue and could face headwinds. On the flip side, domestic-focused sectors such as financials, utilities, and healthcare, with more U.S.-centric revenue streams, might see steadier performance. However, holdings of ETFs like SPDR S&P 500 ETF Trust, Vanguard S&P 500 ETF, and iShares Core S&P 500 ETF lean more toward the Technology sector.

This earnings season, the dollar might steal some headlines, but for well-diversified ETF holders, it's just another piece of the broader market puzzle.

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