Forget Gold, Invest In Dollar ETFs For Safety
Investors’ perception of gold as a store of value and a safe haven in times of turmoil seems to be changing. This is especially true as the looming interest rate hike and the persistent slowdown in China are weighing heavily on the demand for the yellow metal. Additionally, global growth concerns, Greece turmoil and China meltdown failed to reignite the allure of the metal. Apart from these, a spate of positive economic data, waning gold demand and weak overseas trends continued to tarnish the gold bullion. As a result, gold has mostly been trading in the tight range around $1,200 per ounce in 2015. In fact, the bullion plunged to the five and a half year low of below $1,100 per ounce last week and experienced the longest streak of decline in 15 years. The metal is clearly underperforming the other safe haven assets like German bunds and U.S. Treasuries since last September. This trend is likely to continue for the rest of the year, dulling the prolonged safe haven status of gold over the U.S. dollar. Why the U.S. Dollar? The dollar has been surging against the basket of major currencies. The U.S. Dollar Index is up nearly 8% from a year-to-date look and investors are flocking to it as a flight to safety amid the rising rate environment and diverging policies. The Fed is on track to raise interest rates for the first time in almost a decade in its next FOMC meeting to be held in September. If this happens, it would pull in more capital into the world’s largest economy and lead to further appreciation of the dollar. Further, stepped up economic activities as well as rising consumer confidence are fueling the greenback. The U.S. economy is on a modest growth path, having expanded 2.3% in the second quarter after the first quarter sump. The job market is showing clear signs of acceleration with jobless claims at the lowest level since June 2008 and unemployment at a seven-year low. If this wasn’t enough, ultra-cheap money flows in Europe, Japan and some emerging economies will continue to weaken their respective currencies against the greenback. Given this, the U.S. dollar is now viewed as a safe haven asset for 2015 and investors could definitely play this trend by considering any of the following ETFs: PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) This fund offers exposure to the U.S. dollar against a basket of six world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 58% in the euro while 25.5% together in the Japanese yen and British pound. The fund has so far managed an asset base of $1.3 billion while it sees an average daily volume of 2.6 million shares. It charges 80 bps in total fees and expenses and has gained 6.5% in the year-to-date time frame. The product has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) This product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. It allocates higher to the Eurozone currency at 31.9%, closely followed by the Japanese Yen (19.0%) and the Canadian dollar (11.2%). Other currencies like the Mexican Peso, the British Pound, the Australian dollar, the Swiss franc, the South Korean Won, the Chinese Yuan and the Brazilian Real receive single-digit allocation in the fund’s basket. The ETF has amassed $403.8 million in its asset base and charges 50 bps in annual fees and expenses. Volume is good as it exchanges nearly 200,000 shares a day on average. The fund charges 50% in expense ratio. The fund has added about 6.3% so far this year. Bottom Line These U.S. dollar ETFs could be worthwhile for investors seeking safe investments for the rest of the year given a stronger domestic economy, increasing consumer confidence, diverging policies, and the looming interest rate hike. Original Post
