Although some may not label the American economy as the healthiest it can be, it’s strong enough that the U.S. dollar has risen to to rise and remain strong in relation to currencies around the world for the foreseeable future.
For investors, a strong U.S. dollar is somewhat of a mixed bag. There are some investment types that can do well when the greenback is doing well … but others can really take it on the chin when the dollar’s the best currency on the block.
The bad news? There are a lot of popular investments that can be hurt by a strong dollar, including large-cap multinational stocks, emerging-markets stocks and even commodities.
But our focus here is on the best investment types for a strong dollar: These include small- and mid-cap stocks, consumer discretionary stocks, and U.S. fixed-income assets, such as bonds and bond mutual funds.
And to take advantage of these investment types, I give you the best funds for a strong dollar.
Best Funds for a Strong Dollar: Vanguard Mid-Cap Index Fund (VIMSX)
The investing sweet spot, in terms of market capitalization, for a strong dollar is U.S. mid-cap stocks and one of the best funds for this purpose is Vanguard Mid-Cap Index (MUTF:VIMSX).
A significant portion of the the largest companies in the U.S. have operations overseas and when the dollar is higher in relation to other currencies, profits of these companies get a haircut when the earnings in foreign currencies are translated into a higher U.S. dollar.
While small-cap stocks are enjoying a relatively strong 2015 (the Russell 2000 Index is up more than 4% year-to-date, which is double that of the S&P 500 Index), they also carry more market risk, which potentially means more volatility and greater price declines in the next market correction.
This leaves mid-cap stocks in that sweet spot that is not harmed by a stronger dollar like the large caps and less of the late-phase bull market risk of small caps.
The portfolio for VIMSX consists of 374 stocks, 97% of which are U.S. companies, and it has a low expense ratio of 0.23%, or $23 annually for every $10,000 invested.
Best Funds for a Strong U.S. Dollar: Consumer Discretionary SPDR (ETF) (XLY)
When the dollar is strong, American consumers tend to have greater spending power and Consumer Discretionary SPDR (ETF) (NYSEARCA:XLY) is a fund that can take full advantage of this cyclical spending.
This low-cost ETF owns a diverse mix of retail firms, restaurants, media companies, apparel and luxury goods companies, automobile manufacturers and leisure firms.
2015 is already shaping up to be big for consumer discretionary stocks and XLY is no exception. The year-to-date price gain is 5.7%, compared to 2.4% for the S&P 500 Index. The one-, three- and five-year returns also rank comfortably in the top third of category peers.
The expense ratio of 0.15% is among the lowest for consumer discretionary funds.
Best Funds for a Strong U.S. Dollar: iShares Core U.S. Aggregate Bond ETF (AGG)
A rising dollar can help keep a lid on inflation, which can be a positive for U.S. fixed-income assets, specifically with low-cost U.S. index bond funds or ETFs like iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG).
Therefore, although the Federal Reserve is mulling a rate hike, a stronger dollar can ironically help maintain the Fed’s accommodating stance with monetary policy for a longer period of time.
With AGG, you’ll get broad exposure to the U.S. fixed income market with more than 3,000 holdings, most of which are above investment grade, which provides a bit more interest rate risk protection in the event the Fed starts tightening sooner than expected.
Rounding out AGG’s positive attributes is its rock-bottom expense ratio of 0.08%
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.