The rise of the U.S. dollar, which is currently at a multiyear high, is bad news for American companies that generate lots of revenue overseas. Multinational companies like Microsoft, Procter & Gamble, and Caterpillar all recently warned that a strong dollar would eat up their foreign profits.
The strength of the U.S. dollar is mainly caused by three factors. First, the U.S. economy is growing at a more robust rate than other major economies. Second, Japan and the EU both recently launched quantitative easing (QE) plans which devalue their currencies to stimulate economic growth. China could also soon launch a QE plan. Third, the U.S. Fed will likely raise interest rates later this year, which could cause the U.S. dollar to rise even more.
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This means that businesses exposed to the European and Asian markets will record big currency impacts on the bottom line. However, there are several ways shrewd investors can profit from a rising dollar.
"All-American" stocks
A simple way is to buy more "All-American" stocks which are primarily dependent on the U.S. economy. 107 of the companies in the S&P 500 generate over 85% of their revenue from the U.S., according to FactSet Research.
Solid choices from that list include media and cable giant Comcast (CMCSA -0.37%), home supplies retailer Home Depot (HD -1.77%), and tobacco titan Altria (MO 0.12%). All three companies have a record of solid earnings growth, fair forward valuations, and pay decent dividends.
|
Revenue growth (FY 2014, YOY) |
Net income growth (FY 2014, YOY) |
Forward P/E |
Dividend yield |
|
|
Comcast |
6.4% |
22.9% |
16 |
1.7% |
|
Altria |
0.3% |
153.3% |
17 |
3.9% |
|
Home Depot |
5.5% |
17.8% |
19 |
1.8% |
Source: Quarterly earnings reports, Yahoo Finance, April 28.
These companies won't be affected by the strong U.S. dollar, but they face challenges of their own. Comcast must deal with cord cutters who are ditching cable plans in favor of streaming-only solutions. Altria must deal with declining smoking rates and rising excise taxes across America. Home Depot's growth depends heavily on the health of the housing market.
Nonetheless, all three are fairly conservative blue chip stocks which can be considered safe havens against fluctuating currencies.
U.S. dollar ETFs
Another way to invest in the rising dollar is to simply buy an exchange-traded fund like the PowerShares DB U.S. Dollar Bullish ETF (UUP 0.10%). This ETF establishes positions in futures contracts to track the change of the U.S. dollar over time.
In other words, it's an easy way to profit if the U.S. dollar keeps rising without trading currencies directly. So far, the ETF has done a fairly good job at keeping track of the dollar index. Over the past 12 months, the U.S. dollar index rallied 21% and the PowerShares ETF climbed 19%.
More aggressive investors can consider the PowerShares DB 3x Long U.S. Dollar Index Futures ETN (NYSEMKT: UUPT), which aims to triple the monthly return of the U.S. index. ETNs are long-term unsecured debt obligations backed by Deutsche Bank, and not actual investments in futures contracts. The ETN has rallied 57% over the past 12 months -- exactly triple the return of UUP. But if the U.S. dollar starts sliding, those losses will also triple.
Hedged-currency ETFs
Another interesting idea is to invest in QE-stimulated overseas markets like Japan. Although the Japanese economy is being boosted by QE, it's risky to invest directly in Japanese companies, since the strong U.S. dollar reduces those profits.
That's where hedged-currency ETFs -- which reduce yen currency exposure by measuring gains in U.S. dollars -- come into play. One such ETF for the Japanese market is the WisdomTree Japan Hedged Equity Fund (DXJ 0.75%), which has rallied 26% over the past 12 months. By comparison, iShares MSCI Japan ETF (EWJ 0.43%), a broader market-tracking ETF which isn't hedged against currency impacts, is only up 20.5%.
Investors can also use hedged-currency ETFs to invest in the European market. The WisdomTree Europe Hedged Equity Fund (HEDJ -0.25%), for example, has rallied 19% over the past 12 months.
The bottom line
All-American stocks, U.S. dollar ETFs, and hedged-currency ETFs are three solid ways to invest in the rising dollar with U.S. dollars. Investors shouldn't overreact and dump all companies with overseas exposure or load up on ETFs. Nonetheless, investors should recognize these investment opportunities and know how to profit from them.
