Making The Play
There are several ways to play the falling U.S. dollar. The most direct is to be short the dollar or to invest directly in other currencies. PowerShares DB US Dollar Bearish Fund, (UDN) “replicates the performance of being short the U.S. dollar” by holding six major world currencies according to its prospectus. The euro makes up over 50 percent of the fund’s holdings, but it also has exposure to the Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This $40 million ETF charges an expense ratio of 75 basis points. Up nearly 9 percent year-to-date as of August 22nd, UDN performs well when the U.S. dollar depreciates against these other currencies.
Looking to benefit from the more competitive export theme, investors can invest in the WisdomTree U.S. Export and Multinational Fund (WEXP). This ETF tracks companies that have a strong global presence whose “revenue and earnings benefit during periods of U.S. dollar weakness” according to WEXP’s website. Managing $0.7 million assets, WEXP holds approximately 180 names and charges an expense ratio of 33 basis points. Performance has been strong year-to-date through August 22, delivering more than 11 percent.
For those investors worried that the potential upside from currency translation may be mitigated through companies’ hedging programs, reducing the benefit of the weak dollar on exports, international bonds are another way to take advantage of U.S. dollar weakness.
There are many international ETFs for investors to choose among. ETFdb.com lists 13 global ex U.S. bond ETFs, such as the SPDR Barclays Capital Short Term International Treasury Bond ETF (BWZ), which invests in international debt while excluding U.S. bond issuances. Staying away from long duration funds should reduce interest rate risk so investors can benefit from holding bonds denominated in more desirable currencies with less risk.
Targeted international debt, such as emerging market debt, is another way to benefit from dollar weakness. There are over 30 emerging market bond ETFs, like the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), which invests in the local rather than U.S. denominated currency, improving the hedge against the dollar.
Lastly, travel and tourism to the U.S. boosted by a weak dollar is a solid theme, but it is more challenging to find a direct investment. One way is to invest is in air travel. Roughly 20 percent of total airline passengers come from foreign countries traveling to the U.S. Four of the top five largest carriers of foreign passengers are U.S. domiciled airlines -- American Airlines, United, Delta and Jet Blue. Only one foreign carrier, British Airways, made it into the top five based on number of passengers carried to and from the U.S.
The weak dollar is a strong catalyst to boost travel to the U.S., which will directly benefit these airlines. The U.S. Global Jets ETF (JETS) is a concentrated fund, holding between 30-35 companies that participate in the global airline industry. Eighty percent of the holdings are U.S. based companies and the three largest carriers of foreign travelers to the U.S. are in the top holdings. Charging an expense ratio of 60 bps, JETS has returned 4 percent year-to-date as of August 22nd.
The Final Shot
Dollar weakness has real economic implications. It also creates some investment winners and losers. Participating in the currency market is the most direct play, but indirectly investors can take advantage of the boost to U.S. exports and tourism while staying away from the weak dollar denominated bonds with low yields in lieu of foreign debt.