There’s an ETF for That? Betting Against the U.S. Dollar

Betting against the U.S. dollar: short-term

A popular choice for those looking to make a short-term bet against the U.S. dollar is the Invesco DB US Dollar Index Bearish ETF

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UDN seeks to track the performance of the Deutsche Bank Short USD Currency Portfolio Index - Excess Return. This includes not just the returns from the index but also any interest income earned from its holdings of U.S. Treasuries and money market instruments.

The index operates by holding short positions in U.S. Dollar Index futures contracts that trade on the ICE futures exchange. This strategy provides investors with exposure that is inversely related to the movement of the U.S. dollar against a basket of six major world currencies—the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

However, this ETF is not without its risks and complexities. Historically, even though the U.S. dollar has generally been on a declining trend, it has had periods of strength against these six currencies. This natural volatility, compounded by the costs associated with rolling futures contracts, has resulted in UDN underperforming with a total return of -2.45% over the last decade.

Furthermore, with an expense ratio of 0.78%, UDN might be better suited as a tactical, short-term instrument rather than a long-term investment solution. It’s a speculative tool primarily used when there’s a strong conviction that the U.S. dollar will weaken relative to other major currencies in the near term.

Betting against the U.S. dollar: long-term

For a longer-term bet against the U.S. dollar, I think it is more prudent to avoid products based on expensive futures and instead focus on equities. Equities not only allow investors to benefit from the market risk premium but also capitalize on the growth of profitable enterprises.

In considering which companies might benefit from a decline in the U.S. dollar, it’s insightful to look towards those primarily domiciled in the BRICS countries—Brazil, Russia, India, China, and South Africa. These nations often have ambitions and economic policies that position them as alternatives to U.S. dominance in global markets, aiming for greater independence and regional influence.

For investors seeking broad exposure to these markets, the iShares MSCI BIC ETF

is an accessible option. This ETF includes a mix of Chinese, Brazilian, and Indian equities, encompassing a total of 687 holdings. It carries an expense ratio of 0.7%. To bolster this exposure, particularly to include another key BRICS nation, investors can also consider the iShares MSCI South Africa ETF

EZA

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It’s worth noting the absence of Russian equities in typical BRIC funds. Most Russian equity ETFs faced significant challenges following the country’s invasion of Ukraine, with many being liquidated after their values plummeted due to international sanctions and the ensuing market rout.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.