Stock ETFs for Minimizing the 'Greenback Effect'

Includes: FDM, IWC, PZI
by: Gary Gordon

Prior to the year 2000, a strong dollar was often synonymous with a strong U.S. economy. Over the last decade, however, greenback strength has often signified a fear of riskier assets (e.g., stocks, commodities, emerging market currencies, etc.).

In 2010, the correlation between stocks and dollars only intensified. When the U.S. dollar trended lower, riskier stock assets flourished… and when the U.S. dollar moved higher, stocks limped their way towards the closing bell.

There are other reasons for the “coupling,” however. Commodities are priced in the world’s reserve currency. It follows that miners/explorers/materials companies may generate larger profit margins when it takes more dollars to pay for “stuff.” Consequently, materials-heavy iShares Emerging Markets (NYSEARCA:EEM) sported a -.78 correlation coefficient to PowerShares Dollar Bullish (NYSEARCA:UUP) in 2010.

Another reason for the ongoing marriage in 2010 has been the lack of faith in the “euro.” With the year-long sovereign debt crisis emulating the subprime disaster, every European Union hiccup has destabilized the euro (reinforced the buck.) Not surprisingly, then, the iShares Europe 350 Index (NYSEARCA:IEV) has a startling -.90 coefficient with UUP.

(Note: Remember that correlation coefficients travel between 1.0 and -1.0 such that .70, .80, .90, positive or negative, is deemed exceptionally strong. In contrast, .20, .30, .40, positive or negative, is deemed modest.)

On the flip side, the U.S. dollar’s affect on U.S. stock assets may be waning. PowerShares Dollar Bullish (UUP) correlated at .54 with the S&P 500 SPDR Trust (NYSEARCA:SPY) and .61 with the Dow Jones Diamond Trust (NYSEARCA:DIA). Married? Perhaps… but not quite joined at the hips.

So here’s the kicker. Which stock asset classification has had the most casual, least significant relationship with the buck? U.S. microcaps. Here’s how Microcap Stock ETFs performed on the year, alongside their correlation coefficients with PowerShares Dollar Bullish (UUP).

MicroCap Stock ETFs: Performance and Relationship to U.S. Dollar

UUP Correlation Approx YTD %
iShares MicroCap (NYSEARCA:IWC) -0.21 20.2%
First Trust MicroCap (NYSEARCA:FDM) -0.23 23.4%
PowerShares Microcap (NYSEARCA:PZI) -0.33 19.1%
SPDR S&P 500 Trust (SPY) -0.54 12.5%
Dow Jones Industrials (DIA) -0.61 12.6%

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.