UUP: Relatively Safe Asset For Risk-Off Markets

Jul. 25, 2022 4:57 PM ETInvesco DB USD Bullish ETF (UUP)SPY, FXY, IEF, DBC5 Comments

Summary

  • UUP has been in a long uptrend since June 2021.
  • UUP is negatively correlated to U.S. equities and commodities.
  • UUP is useful as a “safe asset” during equity markets risk-off.
  • This idea was discussed in more depth with members of my private investing community, Adaptive Momentum Investing. Learn More »

American Dollar Sign Wearing Gold Crown Isolated On White Background

MicroStockHub

UUP – Invesco DB U.S. Dollar Bullish Fund

Invesco DB USD Bullish ETF (NYSEARCA:UUP) is a well-traded exchange-traded fund ("ETF") with net assets around 1.71B and an expense ratio of 0.75%. It was created on 2/20/2007 and has an average daily trading volume of over 3 million shares. As such, UUP is suitable for use as a “safe" asset during market risk-off periods.

UUP is, in general, negatively correlated to the U.S. equities market. That relationship is clearly seen in the following PERF chart. UUP bottomed in June 2021, six months in advance of the January 2022 SPY top.

SPY and UUP

stockcharts.com

Additional insight into U.S. Dollar Index’s relationship with other asset classes can be gained from the correlation matrix shown in the table below.

Table 1. Asset correlations for time period 03/01/2007 - 06/30/2022 based on monthly returns.

SPY

IEF

UUP

FXY

DBC

SPY

1.00

-0.25

-0.48

-0.17

0.52

IEF

-0.25

1.00

-0.07

0.51

-0.33

UUP

-0.48

-0.07

1.00

-0.32

-0.56

FXY

-0.17

0.51

-0.32

1.00

-0.04

DBC

0.52

-0.33

-0.56

-0.04

1.00

The following chart illustrate the negative correlation of the US Dollar Index ETF and the Invesco CurrencyShares Japanese Yen Trust, FXY. It is obvious that the Japanese Yen shows a trend reversal to the upside. That implies a topping process in the UUP.

UUP and FXY

stockcharts.com

Effect of Rising Interest Rates

Raising the U.S. interest rates strengthens the U.S. Dollar. This effect has played well during 2022 when the FED has raised the rate three times for a total of 1.50%. This month, the FED is expected to raise the interest again by 0.75% or even by 1% in order to combat inflation.

Although, the schedule of the FED raising the interest rates has been very transparent and highly anticipated, it still was associated with a steady increase of the value of the US dollar.

UUP has declined somewhat since July 14. It is my expectation that the dollar would recover that loss, but that it will not sustain a strong rally above that July top.

UUP as “Safe Asset”

Until the beginning of May 2022, I have used the following Base Set of “safe assets”: [BIL IEI IEF TLT]. Since then, I added UUP and DBC to that Universe.

To demonstrate their usefulness, I did some simulations with and without UUP as a safe asset. The simulations were performed for the simplest portfolio possible that invests in SPY during risk-on periods, in XLP during risk-neutral, and in the top safe asset during risk-off.

The summary results are shown in the following table.

Table 2. Summary performance results

2008-22

CAGR

stdev

maxDD

Sharpe Ratio

Sortino Ratio

Base Set

19.36%

13.31%

-13.38%

1.46

1.90

Base Set + UUP

20.03%

13.24%

-13.38%

1.51

1.97

SPY

9.19%

20.35%

-52.36%

0.45

0.54

Conclusion

Although I do not expect UUP to continue its strong uptrend started in June 2021, I also see no reasons to fear a major decline. Therefore, my stance is that UUP in a HOLD.

Additionally, as of this writing, UUP is the top momentum asset in the Safe Asset Universe. My model portfolios are long UUP.

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This article was written by

Toma Hentea profile picture
2.26K Followers
Monitor market state (risk on/off) for successful investing
I am a retired professor of Electrical and Computer Engineering. Since 2011 I have been active in the AAII Chicago South Suburban chapter. My investment objective is to achieve high returns over the long run while allowing occasional downside corrections. Investment decisions are based on quantitative fundamental factors that take into account valuations, earnings growth and price momentum. Market exposure is varied in accordance to the state of leading US and global economic indicators. Options and leverage are used to enhance the performance of my investments.

Disclosure: I/we have a beneficial long position in the shares of UUP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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