The U.S. stock market no doubt has been on a stellar ride, touching fresh highs on several occasions. When the stock market surges, the U.S. dollar tends to struggle and this is what we are seeing now.
Though the dollar index moved higher from a 15-month low against the basket of major currencies following the upbeat July job data report, it is down nearly 9% in the year-to-date timeframe. Additionally, the index recorded its worst run of monthly losses last month since early 2011.
PowerShares DB US Dollar Bullish Fund (NYSEARCA:UUP), tracking the dollar index, shed 9.2% in the year-to-date time frame. This is primarily thanks to rounds of weak economic data, North Korean nuclear missile tests, geopolitical tensions, political turmoil in Washington and diminished expectations for a third rate hike this year.
In particular, Fed Chair Janet Yellen, in her latest testimony, stated that she is not in a rush to raise interest rates given muted inflation. It will continue to follow a gradual rate hike plan and unwinding of its massive balance sheet. Per the central bank, interest rates are close to the neutral level – a level that neither encourages nor discourages economic activity.
Additionally, fading hopes in the implementation of President Donald Trump’s pro-growth agenda after the failure of healthcare bill added to the woes of the greenback. Further, rejuvenated economic growth in Europe and the prospect of an end to its cheap monetary policy era has dealt an additional blow to the dollar. The prospect of a trade war with China and renewed tension on the Korean Peninsula are further weighing on the dollar lately.
Weak Dollar: A Boon
A weak dollar has fueled a superb rally in blue chip companies, which derive most of their revenues from international markets. Notably, Dow Jones broke through the 22,000 milestone for the first time on August 2. This is because weak dollar has made dollar-denominated assets cheap for foreign investors making U.S. multinationals more competitive thereby leading to increased profits. As such, companies having a higher percentage of international sales will likely outperform.
Further, commodities and emerging markets stocks are also getting a lift from a weak dollar. Given this, we have highlighted four ETFs and stocks that are benefiting from the current trend and are likely to do as long as dollar remains weak.
Let’s take a look at some of the best stocks and ETFs to consider in this case.
ETFs to Bet On: Vanguard World Fund (MGK)
With AUM of $3.1 billion, the Vanguard World Fund (NYSEARCA:MGK) offers diversified exposure to the largest growth stocks in the U.S. market by tracking the CRSP US Mega Cap Growth Index. It holds 139 securities in its basket with none accounting for more than 8% of total assets.
It has key holdings in information technology, consumer services, healthcare, consumer goods and financials that account for double-digit exposure each. It charges 7 basis points in annual fees and trades in good volume of around 131,000 shares a day on average.
The fund has gained 18.7% in the year-to-date time frame and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.
ETFs to Bet On: PowerShares DB Commodity Index Tracking Fund (DBC)
The PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC) tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on physical commodities, plus the rate of interest on specified T-Bills.
In total, the index holds 14 different commodities in its basket with heavyweights going to the energy (57%) space, followed by agriculture (21%), industrial metals (12%) and precious metals (9%).
The fund charges 89 bps in annual fees while trades in a solid volume of 2 million shares per day. The product has managed assets of $1.8 billion and lost 6.6% so far this year.
ETFs to Bet On: iShares MSCI Emerging Markets ETF (EEM)
The iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) is the most popular and widely traded emerging market ETF with AUM of $35 billion and average daily volume of more than 52 million shares. The fund tracks the MSCI Emerging Markets Index and holds 853 securities with each holding no more than 4.52% of assets.
However, the product is tilted toward the information technology and financial sectors accounting for one-fourth of the portfolio each followed by consumer discretionary (10.3%). Among the emerging countries, China takes the top spot at 28.3% while South Korea and Taiwan round off the next two spots with double-digit exposure each.
EEM charges 72 bps in fees per year from investors and has gained 25.6% so far this year. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.
ETFs to Bet On: PowerShares DB US Dollar Index (UDN)
The PowerShares DB US Dollar Index (NYSEARCA:UDN) could be the prime beneficiary of the falling dollar as it offers exposure to the basket of six world currencies against the U.S. dollar.
This is done by tracking the Deutsche Bank Short 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, UDN allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound.
The fund has so far managed an asset base of $40.2 million while sees light daily volume of 35,000 shares. It charges 80 bps in annual fees, and has gained 9.6% in the year-to-date time frame.
Stocks to Bet On: Micron Technology, Inc. (MU)
Based in Idaho,Micron Technology, Inc. (NASDAQ:MU) is one of the leading worldwide providers of semiconductor memory solutions.
The stock saw solid earnings estimate revision of 41 cents for this fiscal year over the past 90 days with an exponential expected earnings growth rate of 6695.8%. The stock has a Zacks Rank #1 and VGM Style Score of A.
Stocks to Bet On: Royal Caribbean Cruises Ltd (RCL)
Based in Florida,Royal Caribbean Cruises Ltd (NYSE:RCL) is a global cruise vacation company that operates Royal Caribbean International, Celebrity Cruises, and Royal Celebrity Tours.
Royal Celebrity Tours operates cruise tour vacations in Alaska utilizing the world’s largest glass-domed railcars.
The stock saw solid earnings estimate revision of 19 cents for this year over the past 90 days with an expected earnings growth of 21.75%. It has a Zacks Rank #2(Buy) with a VGM Style Score of A.
Stocks to Bet On: Lam Research Corporation (LRCX)
Based in California,Lam Research Corporation (NASDAQ:LRCX) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits.
It has seen impressive earnings estimate revision of $2.12 over the past 90 days for this fiscal year with an expected earnings growth rate of 25.51%. The stock has a Zacks Rank #1 and VGM Style Score of A.
Stocks to Bet On: Cummins Inc. (CMI)
Based in Indiana,Cummins Inc. (NYSE:CMI) is one of the leading worldwide designers and manufacturers of diesel engines.
It has seen solid earnings estimate revision of 51 cents for this year over the past three months with an expected earnings growth rate of 16.27%. It has a Zacks Rank #2 and a VGM Style Score of A.
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