ETFs and Stocks to Buy on Falling Dollar

By , Zacks Investment Research

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After recording its worst annual decline of 10% in 14 years, the U.S. dollar continues its rough patch this year. This is especially true as the ICE dollar index tumbled to the lowest level against the basket of major currencies since January 2015. As such, PowerShares DB US Dollar Bullish Fund (NYSEARCA:UUP) tracking the dollar index, has shed 1.3% so far this year.

ETFs and Stocks to Buy on Falling Dollar
Source: ©iStock.com/Kuzma

Tightening Policy

Strengthening global economic growth and a rebound in commodity prices that have raised the prospect of monetary policy tightening outside the United States dealt a major blow to the dollar. The cheap monetary policy era ended in Asia with South Korea becoming the first major central bank to increase interest rates for the first time in more than six years. The Bank of England, too, has raised interest rates for the first time in more than 10 years.

The European Central Bank (ECB) will start scaling back its massive €60 billion per month asset buying program to halve from January 2018 until at least September 2018 while the Bank of Japan will continue its massive stimulus program until the economy reaches a sustained 2% inflation.

The tightening of policy will be in line with the Fed and push the U.S. dollar lower and other currencies higher, signaling more pain for the greenback. Additionally, the political development in the Euro zone is giving support to the euro and a report that the Netherlands and Spain were open to a deal for Britain to remain as close as possible to the trading bloc led to a spike in sterling.

The weakness in the greenback came despite the dual tailwinds of U.S. economic growth being on solid footing and the Fed being on track to raise interest rates. The combination usually leads to a stronger dollar.

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, the Dow Jones climbed 25% last year, marking the best annual performance since 2013.

It breached the 20,000-mark on Jan 6, 2017 and moved up 5,000-points last year, marking the biggest annual gain in its history. Further, the 30-stock index topped 25,000 on Jan 4, 2017 registering its fastest 1,000-point move ever.

This is because a 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. Moreover, commodities, emerging markets as well as gold mining 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.

ETFs to Buy on Falling Dollar: Vanguard Mega Cap Growth ETF (MGK)

With AUM of $3.6 billion,Vanguard Mega Cap Growth ETF (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 142 securities in its basket with none accounting for more than 8.7% of total assets. It has key holdings in information technology, consumer services, healthcare, financials, consumer goods and industrials that account for double-digit exposure each. It charges 7 basis points in annual fees and trades in good volume of around 112,000 shares a day on average.

The fund has gained 5.1% so far this year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

ETFs to Buy on Falling Dollar: PowerShares DB Commodity Index Tracking Fund (DBC)

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 1.9 million shares per day.

The product has managed assets of $2.4 billion and gained 2.2% so far this year.

ETFs to Buy on Falling Dollar: iShares MSCI Emerging Markets ETF (EEM)

iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) is the most popular and widely traded emerging market ETF with AUM of $42.1 billion and average daily volume of more than 49.5 million shares.

The fund tracks the MSCI Emerging Markets Index and holds 857 securities with each holding no more than 5.7% of assets. However, the product is tilted toward the information technology and financial sectors that account for one-fourth of the portfolio each, followed by consumer discretionary (10%).

Among the emerging countries, China takes the top spot at 30.4% while South Korea and Taiwan round off the next two spots with double-digit exposure each. EEM charges 69 bps in fees per year from investors and has gained 5.1% so far this year. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

ETFs to Buy on Falling Dollar: VanEck Vectors Gold Mining ETF (GDX)

VanEck Vectors Gold Mining ETF (NYSEARCA:GDX) is the most popular and actively traded gold miner ETF with AUM of $7.5 billion and average daily volume of around 37.8 million shares.

The fund follows the NYSE Arca Gold Miners Index, holding 51 stocks in its basket with each security accounting for less than 9% share. Canadian firms account for half of the portfolio while the United States (15.2%) and Australia (15%) round off the top three.

The fund charges 51 bps in annual fees and has gained 3.3% in the initial weeks of 2018.

Stocks to Buy on Falling Dollar: Caterpillar Inc. (CAT)

Based in Peoria, IL, Caterpillar Inc. (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets.

CAT stock saw solid earnings estimate revision of $1.14 for this year over the past 90 days, with an expected earnings growth rate of 21.9%. The stock has a Zacks Rank #2 and VGM Style Score of B. It gained 8.1% in the initial week of 2018.

Stocks to Buy on Falling Dollar: PetroChina Company Limited (PTR)

Based in Beijing, the People’s Republic of China, PetroChina Company Limited (NYSE:PTR) is engaged in a range of petroleum related products, services and activities.

PTR stock saw solid earnings estimate revision of $1.34 for this year over the past 90 days with an expected earnings growth of 76.24%. It has a Zacks Rank #2 and a VGM Style Score of A. Shares of PTR are up 9.9% so far this year.

Stocks to Buy on Falling Dollar: Exxon Mobil Corporation (XOM)

Based in Irving, TX, Exxon Mobil Corporation (NYSE:XOM) is the largest publicly traded international energy company engaged in the exploration for and production of crude oil and natural gas in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania.

XOM has seen impressive earnings estimate revision of 47 cents over the past 90 days for this year with an expected earnings growth rate of 19.53%. The stock has a Zacks Rank #2 and VGM Style Score of B. It has added 4.6% so far this year.

Stocks to Buy on Falling Dollar: Morgan Stanley (MS)

Based in New York, Morgan Stanley (NYSE:MS) is a preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: securities; asset management; and credit services.

MS has seen solid earnings estimate revision of 25 cents for this year over the past three months with an expected earnings growth rate of 18.21%. It has a Zacks Rank #2 and a VGM Style Score of B. The stock has climbed 5% in the same time frame.

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