ETFs for a Strong Dollar

Since the Federal Reserve started raising interest rates, we have seen a dramatic increase in the US dollar. The main reason is that the dollar is becoming a more attractive investment for investors at home and worldwide.

There are a lot of dynamics at play that investors need to consider when the dollar is rising. Such as, a rising dollar will hurt domestic companies that sell internationally because the exchange rate lowers their profits. However, companies that import raw materials will benefit from a strong dollar.

Due to the strong dollar, some emerging markets will suffer if they borrow in dollars. This happens because it becomes harder for borrowers to pay back their debt as the dollar strengthens. Furthermore, these same countries can get hit with a double whammy if they also import many US goods since those goods will now be more expensive.

Let us look at a few Exchange Traded Funds that you can buy that will help your portfolio weather this strong dollar storm.

I would like to mention the first two ETFs are also rather obvious picks. The Invesco DB US Dollar Index Bullish Fund (UUP) and the WisdomTree Bloomberg US Dollar Bullish Fund (USDU) both are long the US dollar against a basket of other global currencies.

In plain English, these funds increase when the dollar rises and decline when the dollar declines compared to other international currencies. There is no magic here and nothing fancy going on; if you think the dollar is going higher, buy one of these two funds and hold it for a while.

Another set of ETFs you could buy are dividend-paying ones. Something like SPDR Portfolio S&P 500 High Dividend ETF (SPYD), the WisdomTree US High Dividend Fund (DHS), or my favorite, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

These will typically do well when the dollar rises for a few reasons, mainly because the stronger dollar will likely hit the earnings of companies with large exports. But, as companies, especially those in the Dividend Aristocrat group, are very reluctant to cut their dividends, the stock prices of these firms usually hold up better than the non-dividend paying stocks.

Another option is to focus on industries that have high US imports. The two top industries with the highest imports are pharmaceuticals and medical equipment. So you could buy Exchange Traded Funds that own pharma and medical equipment companies - Something like the VanEck Pharmaceutical ETF (PPH) or the iShares US Medical Devices ETF (IHI).

Since these ETFs focus on two industries with high levels of imports, the strong dollar will help lower their material costs, which should translate to making companies more profitable.

Another industry you may want to look at is the auto industry. Auto manufacturers import a lot of the parts that go into building a vehicle. Plus, a sizable number of automobiles sold in the US are actually built in other countries.

The auto industry has many moving parts and many different factors that could cause stocks operating in this industry to decline. Finally, the auto industry doesn't have a great Exchange Traded Fund.

However, if you still want to look into it, check out the First Trust NASDAQ Global Auto Index Fund (CARZ) or the Simplify Volt RoboCar Disruption and Tech ETF (VCAR).

As things currently sit in the US economy, it would appear that the Federal Reserve will continue to increase the federal funds rate in the short term. That means the likelihood that the US dollar will continue to increase is high.

So, while you may feel you missed the big move on the dollar, that may be true that the most significant part of the move has occurred, but that doesn't mean that you still can't get a little more juice out of this lemon.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.