Dollar Long ETF May Have Much Farther to Run as Negative Sentiment Weighs on Developed ETFs

Includes: EWA, EWC, UUP
by: Don Dion

Investors overly focused on U.S. financial problems have missed the growing bubbles in other developed markets. PowerShares DB U.S. Dollar Bullish Fund (NYSEARCA:UUP) may have much farther to run as investors wake up to reality.

While analysts and experts alike have been focused on bashing the U.S. and the greenback throughout the global economic meltdown and recovery, other developed nations around the globe have been left free to inflate their own massive equity bubbles.

The newly ignited interest in international housing bubbles, coupled with the ongoing debt crisis facing Greece and Portugal, are making developed nations and the ETFs that track them very unattractive instruments for the time being. Therefore, it may be a good time to drop and avoid any single nation funds focused on these developed countries.

Instead, investors concerned for the future of developed nations should stick to the PowerShares DB U.S. Dollar Bullish Fund (UUP). Stress in any of these countries will put pressure on their respective currency. This scenario should lead the greenback higher.

With the U.S. real estate industry moving slowly along the road to recovery, an increasing number of fingers are being pointed at the housing markets of other developed nations, including Australia and Canada, as the source of the next crisis.

Aiding to concerns, in the second half of 2009 Australian home prices saw their sharpest rise in years, according to a recent report from the Australian Bureau of Statistics.

More recently, on Monday, The Wall Street Journal ran a story exposing the growing bubble concern stemming from the Canadian housing rally that has seen home prices rise 23% from January 2009 lows.

The fact that the Journal is showing interest in the bubble risks facing Canada’s housing market lends credence to my past warnings about playing Canada. On a number of occasions starting at the close of 2009, I have advised investors to avoid EWC, which is designed to track the broad Canadian markets. This fund has over a third of its portfolio dedicated to the nation’s financial system, leaving it dangerously vulnerable to a hit in the event that home prices see a steep drop.

Going forward, the growing negative sentiment regarding bubble concerns in developed nations could be a sign that real trouble is looming. If that is the case, investors holding ETFs like iShares MSCI Canada Index Fund (NYSEARCA:EWC) and the iShares MSCI Australia Index Fund (NYSEARCA:EWA) could be in for an unexpected drop.

Disclosure: Long UUP