ETFs That Benefit From A Rising U.S. Dollar

Includes: DXJ, IJR, IWM, UUP, VCR, VDC
by: Tom Lydon

The U.S. dollar is regaining strength against major currencies such as the euro, yen and British pound. Various exchange traded funds allow investors to play the latest rise of the greenback.

"The fact is that the U.S. dollar is the reserve currency of the world and immediate steps must be taken to mitigate the risk of the possible substantial decline of it. If the fiscal cliff deteriorates further or tumbles substantially, the repercussions for the rest of the world will be extremely serious," Perun Naidoo, risk management expert, said in a recent report.

The U.S. dollar index is up 3% so far in 2013, a big jump in three months. However, some of the "rise" in value can be attributed to the weakness seen in the euro, Japanese yen and British pound. Some events that are intervening in the currency markets are the unsettled debt issues in the Eurozone, compounded with the latest Cyprus crisis. The change in Japan's economic stimulus is another factor that is weakening the yen, reports Jonathan Burton for MarketWatch.

For those bullish on the continued rise in the U.S. dollar, the PowerShares DB US Dollar Index Bullish Fund (NYSEARCA:UUP) . This portfolio pits the greenback against six foreign currencies: the euro; British pound; yen; Canadian dollar; Swiss franc and Swedish krona. The ETF has seen larger than normal trading volume due to the recent investor demand for U.S. dollars as investors have exited the euro, reports Zacks.

A different angle on gaining exposure to a rising greenback is to invest in U.S. large-cap companies. The larger U.S. companies may have a tougher time in the global marketplace, however, a strong U.S. consumer is enough for domestic companies to profit. The consumer staples sector is an indirect play on the greenback. The Vanguard Consumer Staples (NYSEARCA:VDC) or the Vanguard Consumer Discretionary (NYSEARCA:VCR) both benefit from the U.S. dollar's strength.

Another angle for U.S. dollar exposure is through small-cap company investing. The strength in the currency is a "tailwind for companies with higher domestic revenue," Couden said. The stronger dollar is a catalyst for U.S. small-cap company growth. The iShares Russell 2000 Index (NYSEARCA:IWM) or the iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) are both small-cap plays that also include some mid-cap exposure.

The WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) is an easy, one-shot way to invest in Japanese equities as the yen continues to weaken and the U.S. dollar strengthens. The weaker yen has created more competition among Japanese and U.S. exporters. The ETF hedges the yen currency exposure, so that gains are not measured in yen, they are measured in U.S. dollars.

PowerShares DB US Dollar Index Bullish Fund

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.