Today's Fed Rate Hike to Spur Greenback Rally: 4 Funds to Buy

The US dollar had been slipping recently while euro gained strength. The US dollar had pulled back from the multi-month high, as the euro marched higher after the European Central Bank (ECB) provided a lower-than-expected level of monetary stimulus. However yesterday, the US dollar showed an uptrend again as investors await the FOMC statement to announce a rate hike.

The pullback from an eight-and-a-half month high may turn out to be a blip. Indications of the US central bank lifting rates are very strong; and this belief had been propelling the dollar in recent months.

The US dollar will be one of the prime beneficiaries of a rate hike, which in turn will spur demand for dollar, as dollar-denominated assets would provide higher returns.

Separately, analysts believe that European Central Bank's massive asset purchasing program may keep the euro down, eventually boosting the dollar. Many investors remain long-term bullish on the world's reserve currency due to a recovering American economy.

A stronger dollar can be profitable for mutual fund investors. A simple example would be domestic companies that are major importers and foreign ADRs that are major exporters to the US give investors a chance to profit. So, large cap international stock funds should perform well during the dollar surge. Similarly, small and mid-cap domestic companies should benefit. This apart, currency focused funds that bet on the US dollar seem obvious gainers. So, let's pick the favourably ranked funds for investors who are interested to play the dollar surge.

Dollar Rally

Early this year, the US Dollar Index (DXY) had shown a rapid uptrend and the dollar had spiked to a 12-year high against the euro. While in the second and third quarters the dollar rally somewhat faded, the greenback had started moving higher again since Oct 14, and gained more than most major currencies.

However starting December, the dollar had trended lower, somewhat eroding the dollar's year-to-date gains. Disappointing stimulus measures in the Eurozone pushed the euro to a one-month high versus the dollar. Nonetheless, the dollar is expected to gain from the series of rate hikes that the Fed is planning. The central bank has made its intentions amply clear and its "data dependent" decision making will view last Friday's jobs numbers in a favorable light.

What for Mutual Fund Investors?

The sentiment will not drastically jump to selling the dollar. In fact, the case for dollar's northward rally is stronger. However, a drama, though least expected at this point, can never be ruled out. Staying cautiously bullish will thus not be a bad idea, and banking on that sentiment adding certain funds with a favorable Zacks Mutual Fund Rank should be the right approach.

There are rules for the game (perhaps picking the best-ranked funds), but playing the dollar rally should be exciting if we identify the correct sectors.

Currency Mutual Funds

To begin with, investors may bet on mutual funds that invest in currencies. They may use money market instruments, derivative instruments and include forward currency contracts among others. These mutual funds may be tracking the dollar index, which is measure of the currency against a basket of foreign currencies. The advantage of these funds is that they track currency fluctuations. Investors in these mutual funds know that their investments are concentrated on currencies.

ProFunds Rising US Dollar Investor ( RDPIX ) seeks daily return that is inverse of the daily performance of the currencies included in the U.S. Dollar Index. The index measures US dollar's performance against the performance of six key currencies.

The weightings are - 57.6% in euro; 13.6% in Japanese yen; 11.9% in British pound; 9.1% in Canadian dollar; 4.2% in Swedish krona and 3.6% in Swiss franc. The fund prospectus notes, "Accordingly, as the value of the US dollar appreciates versus the Benchmark, the performance of the Fund increases."

RDPIX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) and has gained 5.8% and 8% over the year-to-date and one-year periods, respectively. Since Oct 14, RDPIX is up over 3.3%.

Non-US Large Cap Funds

As already mentioned, most large-cap international funds bet on companies that are exporters. These large-cap companies should profit by selling their goods to the US in a strong-dollar environment.

Cambiar International Equity Investor ( CAMIX ) invests a large chunk of its assets in equity securities of medium to large-cap non-US companies. For greater liquidity and lesser custodial expenses, CAMIX buys American Depositary Receipt listings of foreign firms on the US exchanges instead of buying them on foreign exchanges.

CAMIX currently carries a Zacks Mutual Fund Rank and has gained 5% and 5% over the year-to-date and one-year periods, respectively. CAMIX's 3- and 5-year annualized returns are respectively 7.5% and 5.8%.

US Small & Mid Cap Funds

When dollar surges in value against other countries, it is difficult for US exporters to sell their products overseas as they become expensive. So, smaller firms that mostly sell their products in the domestic space tend to gain in a high-dollar environment. These are not typically exporters and stay safe from the adverse effects of a surging dollar.

Oppenheimer Discovery A ( OPOCX ) primarily focuses on acquiring common stocks of domestic companies having an impressive growth potential. OPOCX invests in the securities of small cap companies having market capitalization below $3 billion.

OPOCX currently carries a Zacks Mutual Fund Rank #2 and has gained 1.1% and 4.5% over year-to-date and one-year periods, respectively. OPOCX's 3- and 5-year annualized returns are respectively 14.2% and 11.5%.

Consumer Discretionary Funds

Funds investing in the consumer "discretionary" sector tend to benefit from a rising dollar. These companies sell products and services in the US. A stronger dollar and an improved economy may also improve the purchasing power of US consumers.

Fidelity Advisor Consumer Discretionary A ( FCNAX ) seeks growth of capital. FCNAX invests mostly in securities issued by firms that are involved in the manufacture and distribution of consumer discretionary products and services. FCNAX uses fundamental analysis and also looks into economic and market conditions for investment decisions.

FCNAX currently carries a Zacks Mutual Fund Rank #1 and has gained 3.5% and 6.9% over year-to-date and one-year periods, respectively. FCNAX's 3- and 5-year annualized returns are respectively 17.5% and 13.5%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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