Forget Trading Forex, Use ETFs for the Strong Dollar Trade

NEW YORK (TheStreet) — Trading foreign currency has swelled in popularity in recent years, but investors can take a more conservative approach to profiting from the rising U.S. dollar with exchange-traded funds.

The PowerShares DB U.S. Dollar Index Bullish Fund (UUP) is a good place to start for those new to investing in foreign currency. UUP is the tracking ETF for the widely followed U.S. Dollar Index. That means UUP tracks the performance of the greenback against a basket of major developed market currencies, including the euro, yen, British pound, Canadian dollar, Swedish krona and the Swiss franc.

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More than 20 global central banks, including the Bank of Canada and Sweden’s Riksbank, have lowered interest rates this year, helping UUP to a year-to-date gain of 9.3%. As of earlier this week, investors had poured $ 245.2 million into the ETF this year, good for the fourth-best total among all PowerShares ETFs. 

UUP options “have been incredibly active,” since the Federal Reserve’s rate decision, and many puts, or bets on a decline, were “closed out at tidy profits” as the dollar weakened, Street One Financial Vice President Paul Weisbruch in an interview. About $ 245 million has entered the fund so far this year, enabling it to maintain its status as the largest U.S.-listed currency ETF, with about $ 1.33 billion in assets under management.

“Since the FOMC rate decision several weeks back, UUP listed options have been incredibly active, with well-timed opening buying of June 25 puts with much of these positions being closed out at tidy profits given the US Dollar decline in the past couple sessions. UUP as a fund itself however has still managed to pull in net assets year to date (about $ 245 million entering the fund YTD, maintaining its lead as the largest U.S. listed Currency ETF with about $ 1.33 billion in AUM),” said Street One Financial Vice President Paul Weisbruch in an interview with TheStreet.com.

UUP has a competitor in the form of the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU). Since it is actively managed, USDU’s holdings can change just as the holdings in a comparably structured equity mutual fund would.

Currently, the $ 340.4 million USDU allocates over half of its combined weight to short positions in the euro and yen, meaning the ETF is positioned to benefit from policies by the Bank of Japan and European Central Bank that weaken those currencies.

USDU, which debuted in December 2013, is up 6% so far this year.

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