In early October, I commented about new market realities to embrace now. Since quantitative easing is officially over, I’m looking at portfolio changes that advisors are making in this new environment. This is the second in a three-part series of blogs for advisors on 3 Trades for QE’s End. Part one looked at opportunities in high-yield debt. This blog looks at the dollar.
Who wouldn’t want to own the greenback? With the Dow and S&P 500 regularly hitting new highs and the economy continuing to put up good numbers, the U.S. is a tropical island in a world dominated by fiscal malaise and geopolitical chaos.
The prospect of higher rates is also propping up the dollar. If interest rates ratchet up domestically, foreign investors could borrow currencies with lower rates (like the Swiss franc and Japanese yen), and buy dollars, profiting from the differential. That is known as the currency carry trade, and can be directly accessed through the Powershares DB Currency Harvest ETF (DBV). However, advisors should note that the fund does generate a K-1 at the end of each year.
There are a few equity-centric ways to capture the rising dollar trend as well. As the greenback goes up in value relative to other currencies, foreign goods are less expensive in the states. Retailers are a natural beneficiary. Consider the S&P Retail ETF (XRT) as a sector play.
Retailers may also benefit from the drop in energy prices, which gives U.S. consumers more money to spend. And since crude is denominated in dollars, a rise in the currency makes the commodity less attractive to foreign buyers, forcing prices even lower.
Of course, for every winner there are bound to be losers. Firms that derive the bulk of their revenue overseas may find their goods out of reach for non-US consumers. In a rising dollar environment, it’s wise to have a home bias when it comes to investing.
See the first blog in this series: 3 Trades for QE’s End: Searching for Alpha for November 2014
QE architect and former Federal Reserve Board Chairman Ben Bernanke recalled the dark days of the financial crisis in a presentation at Schwab Impact in Denver on Nov. 5: Bernanke Recalls ‘Panic’ During Fed Tenure, Defends QE