How To Play The Strong Dollar

It is not breaking news that two of this year's top-performing currency exchange traded funds are the PowerShares DB US Dollar Index Bullish Fund UUP and the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.

UUP and USDU, both of which are designed to profit from dollar strength, are both up more than 6 percent this year. Although money has flowed into both funds this year, currency ETFs still represent just a small sliver of the overall ETF universe. That is not a bad thing and the good news for investors looking to play the greenback's ongoing ascent via equities is that there this a new ETF dedicated to that objective.

The WisdomTree Strong Dollar U.S. Equity Fund UUSD debuted in late July so its sample set is small for tracking its performance relative to the dollar. USSD tracks the WisdomTree Strong Dollar U.S. Equity Index (WTUSSD), which “measures the performance of U.S. based companies that derive more than 80% of their revenue from the United States,” according to WisdomTree.

An investor that knew nothing of USSD would likely expect the ETF to live up to its billing as a strong dollar beneficiary by being lightly allocated to sectors such as consumer staples, technology and industrials. Conversely, it would be reasonable to expect an ETF like USSD would be heavily tilted toward sectors that are dependent on domestic trends for the bulk of their profits and revenue. Think banks, health care and utilities.

USSD makes good on those promises. Dollar-sensitive industrial, consumer staples and technology stocks combine for less than a quarter of the new ETF's weight. That is good news. The even better news is that domestic-dependent banks, utilities and health care names combine for 45 percent of the fund's weight. With banks and utilities, it is arguably obvious these sectors derive the bulk of their revenue from inside the U.S., but health care is a credible strong dollar sector, too.

USSD's second-largest sector weight is a just over 20 percent allocation to consumer discretionary names, but not the export-dependent variety. The bulk of the new ETF's discretionary holdings are comprised of media companies, retailers and auto-related firms that generate most of their sales at home rather than abroad.

Probably attributable to its large health care and utilities weights, USSD's underlying index has a price-to-earnings ratio of 22.8, a premium to the S&P 500. The index has a dividend yield of 2.13 percent, slightly below where 10-year Treasurys closed Friday, but there is ample room for dividend growth because financial services and consumer discretionary have been two of the biggest contributors to S&P 500 dividend growth since the financial crisis.

USSD charges 0.33 percent per year, or $33 per $10,000 invested.