As Dollar Drops, Foreign ETFs Rock; Here are 56 to Consider ...

The U.S. dollar can’t get out of its own way. It’s falling against the euro. It’s falling against the British pound. It’s falling against the Swiss franc. It’s falling against the Canadian dollar, the Australian dollar, the New Zealand dollar, and more.

Just look at this chart of the U.S. Dollar Index, which tracks the performance of the buck against a basket of six major world currencies. You can see it’s been a one-way trip lower since December 2016 …

The move is reverberating throughout the ETF market. It’s a key reason why the PowerShares DB US Dollar Index Bullish Fund (UUP, Rated “C”) was recently down 8.6% year-to-date, while ETFs that track foreign currencies are doing so well. Leveraged products like the ProShares Ultra Yen (YCL, Rated “D”) and ProShares Ultra Euro (ULE, Rated “D”) were up 9.2% and 21.8% as of earlier this week, and even the unleveraged CurrencyShares Australian Dollar Trust (FXA, Rated “D”) was up 11.1%.

So why is the dollar doing so poorly? I believe its losses stem from changing expectations about relative global growth rates and future central bank policies. Let me explain …

We all know the Federal Reserve is in the midst of a tightening cycle. It first raised short-term interest rates back in December 2015, and has now done so a total of four times (most recently in June).

During the early part of this cycle, the European Central Bank was adamant it wouldn’t follow in the Fed’s footsteps. In fact, the ECB actually ramped UP its quantitative easing plans as the Fed took the first tentative steps toward tightening.

But foreign economic data began to improve several months ago. That’s particularly true in Europe. As a matter of fact, we just learned that GDP in the Eurozone rose at an annualized rate of 2.3% in the second quarter. That’s the fastest since 2011!

So investors are increasingly expecting the ECB to backtrack – to dial down its QE plans and/or start laying the groundwork for future rate hikes there. And in response, they’re “jumping the gun” – buying the heck out of the euro to position for tighter monetary policy overseas.

Politics are likely also playing a role. The increasing chaos and frequent personnel changes in the Trump White House are probably causing some investors to pull back from the dollar and dollar-based investments. Trump’s failure to enact the growth-boosting measures he proposed, including large tax cuts and massive infrastructure spending programs, are also leading to questions about whether we’ll ever see 3% GDP growth here.

I don’t know how far the dollar will sink. But I do know you got an early “heads up” about the trend right here, so you should be profiting nicely from it.

For instance, in this column back in late March, I shared an International Stock Screener with you — and suggested you consider the names on it as BUYs for your own portfolio.

At the time, China’s New Oriental Education and Technology Group (EDU, Rated “B-”) was showing a year-to-date gain of 35.4%. Tucows (TCX, Rated “B”) of Canada was up 31.1%, while Unilever N.V. (UN, Rated “B”) of the Netherlands was up 24.3%. Those gains have now swelled to 83.8%, 49.9%, and 45.2%.

Then in April, I wrote that all “Frexit” talk was overblown and that the last thing you wanted to do was sell your foreign stocks. I even created an “Exit” Stock Screener, and told you to consider buying the names in it rather than listen to the scary predictions you might be hearing. All but two of the 33 stocks on it are showing double-digit, year-to-date returns – and beating the S&P 500 Index.

Now, both foreign currencies and foreign ETFs have come a long way. That means we could see a shorter-term correction at any time. But I still think foreign-focused funds could generate handsome longer-term gains for you. So to help you find some potential ETF BUYs, I created this Best Foreign ETFs in 2017 Screener.

It lists every ETF focused on foreign stocks – regardless of their capitalization or style bucket. I eliminated ETFs with assets of less than $100 million, and a Weiss Rating of less than “C-”. Then I sorted by year-to-date return.

The Barclays ETN+ FI Enhanced Europe 50 ETN (FEEU, Rated “C-”) sits at the top of the resulting list, with YTD returns of 37.5%. But it’s a leveraged Exchange Traded Note that targets an index of 50 leading European blue chip stocks.

If you want to stick with unleveraged products, you’ll find the Vident International Equity Fund (VIDI, Rated “C”) and the Cambria Global Value ETF (GVAL, Rated “C”) next on my list. They’re up 24.1% and 23.3%, respectively – handily topping the 11.6% return of the SPDR S&P 500 ETF (SPY, Rated “B”). As a matter of fact, all but five of the 56 ETFs in my Screener are beating the S&P.

Bottom line: Don’t forget to expand your investment horizons! Many of the best-performing ETFs are focused on stocks beyond our borders.

Until next time,

Mike