The first 10 months of 2017 haven't been great for the greenback. PowerShares DB US Dollar Bullish ETF UUP is off 7.9% so far this year. But the currency gained momentum from the fourth quarter with 1.7% one-month returns (as of Oct 31, 2017). Hawkish comments from the Fed despite still-subdued inflation, a few upbeat economic readings and higher chances of the passage of Trump's tax plan made this possible.
Behind the Rise
Most recently, Republicans passed a $4 trillion budget through the House by an ultra-slim margin . Republicans managed to bypass "divisions within the party by voting 216-212" to allow them to progress on a $1.5 trillion tax cut. This gave way to renewed Trump trade and dollar strength in recent trading (read: GOP Nears Tax Reform: Buy These ETFs ).
Plus, the first reading of the U.S. GDP for the third quarter rose 3.0% year over year in the July-September period after increasing at a 3.1% clip in the second quarter. The reading beat 2.5% growth forecast. The stellar growth was attained despite two consecutive hurricanes in the third quarter. Hurricanes led to losses of $121.0 billion in privately owned fixed assets and hurt government-owned fixed assets by about $10.4 billion, as per CNBC.com .
Meanwhile, sales of new U.S. single-family homes suddenly grew in September, touching the highest level in about 10 years, and defying economists' expectations of a 0.9% decline. The percent sales surge was the highest since January 1992, as per CNBC (read: 3 ETFs to Buy as New Home Sales Surge ).
If these were not enough, many Fed policymakers favor another rate hike in December if the medium-term outlook stays more-or-less the same. They also believe that the economy will likely ricochet from the fourth quarter thanks to the pickup in activity in the hurricane-affected areas. Now, with Q3 growth also coming in upbeat, chances of another Fed rate hike this year are higher (read: Fed to Hike in December? Buy Quality ETFs ).
ETFs to Play
Given the strengthening economic fundamentals, the bullish trend in the greenback is expected to continue at least for the short term. Investors seeking to make a play on the U.S. dollar could consider any of the following ETFs (see: all the Currency ETFs here ):
UUP in Focus
This fund could be the prime beneficiary of the rising dollar as it offers exposure against a basket of world currencies. These include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The total expense ratio of the fund is 0.80%.
iShares Russell 2000 Growth ETF IWO
Notably, small-cap stocks have heavier domestic exposure and are thus benefited by a stronger dollar while these are likely to underperform if the U.S. dollar falls. Plus, the growth picture is brightening globally calling for a small-cap growth ETF investing. The fund looks to track the Russell 2000 Growth Index. The index measures the performance of the small-capitalization growth sector of the U.S. equity market.The fund was up about 1% in the last 10 days (as of Oct 31, 2017).
ProShares UltraShort Gold GLL
If the dollar rises, gold prices will likely decline. In such a scenario, investors can benefit from investing in inverse gold ETFs. ProShares UltraShort Gold looks to follow double the opposite of the daily performance of gold bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund was up about 2.3% in the last 10 days (as of Oct 31, 2017).
iShares Currency Hedged MSCI EAFE ETF HEFA
If the dollar gains, currency-hedged foreign ETFs are likely to gain traction. This is because, several developed economies are still practicing easy money policy. So, funds like HEFA are likely to be a good bet. HEFA added about 1.4% in the same time frame (as of Oct 31, 2017).
ProShares Short MSCI Emerging Markets EUM
The underlying index looks to give inverse exposure to the emerging markets. Since these markets lose some appeal in a rising dollar environment, investors consider playing an inverse emerging market ETF. The fund ticked up 0.3% in the last 10 days (as of Oct 31, 2017).
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report PWRSH-DB US$ BU (UUP): ETF Research Reports ISHARS-RS 2K GR (IWO): ETF Research Reports PRO-SH MSCI EM (EUM): ETF Research Reports PRO-ULS GOLD (GLL): ETF Research Reports ISHA-CH MS EAFE (HEFA): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report