ETFs to Watch as Trump Talks Trade, Trajectory of the Dollar

Donald Trump is mad as heck and he’s not going to take it any more – at least when it comes to the U.S. dollar.

That’s the signal the newly elected President and his top advisors sent out loud and clear this week. They don’t want the dollar to be as strong as it is, or key foreign currencies in Europe and Asia to be as weak as they are, because they feel it unfairly punishes U.S. companies. More specifically, they say a strong dollar makes our products too expensive in the global marketplace vis-à-vis products produced in countries with cheap currencies.

“Every other country lives on devaluation,” Trump said on Tuesday. You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies.”

His remarks followed comments from the new director of the National Trade Council, Peter Navarro, who said Germany was unfairly competing against us by maintaining a “grossly undervalued” euro currency.

If you’ve followed the capital markets as long as I have, you know how much of a break from longstanding U.S. policy this is. Both Republican and Democratic presidents have generally strayed away from talking the dollar up or down for the past couple of decades.

Plus, Treasury Secretaries for both administrations have generally promoted a “strong dollar” policy – at least in their public comments. It was considered bad form to advocate for a lower currency. Trump is blowing up that model. He’s putting the world on notice that the U.S. is going to play the game everyone else already is, and to heck with tradition.

Now, let’s take a look at the chart of the U.S. Dollar Index (DXY). It’s an index that tracks the performance of the greenback against a basket of six foreign currencies, with the euro the most heavily weighted at 57.6%. The remaining currencies are the Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%).

You can see that the dollar took off like a rocket in 2014, then spent most of 2015 and 2016 in a sideways chop. But late last year, as the economy accelerated, the Federal Reserve hiked interest rates again, and Trump got elected, the DXY broke out to the upside above the 99-100 level.

We’re right back at that key technical level, which makes this a very interesting time for investors in several ETFs. If Trump’s verbal war against the greenback takes hold, then we could see foreign currency ETFs and foreign bond ETFs do very well. That’s because a weaker dollar either directly or indirectly boosts their value.

But if solid economic data inspires the Fed to get more aggressive with its planned interest rate hikes, his comments might be all for naught. That’s because higher short-term rates make a country’s currency more attractive, all else being equal.

So here is a list of currency and foreign bond ETFs, from our database of more than 1,980 funds, that have the best 1-year total return. You can see that they range in size from as little as a few million dollars in assets on up to $3.8 billion.

Some of these ETFs were already doing quite well because they track currencies or bonds issued by countries with close ties to the energy sector. Think Brazil, Russia, and the like. Others have done well because their sponsors hedge out their interest rate risk. That’s a plus in a rising-rate environment.

Now, if Trump succeeds in knocking the dollar down further, many of these ETFs could perform even better in the months ahead. So I’d put them on your watchlist and see how the DXY behaves in this 99-100 level. A breakdown in the dollar could lead to a break out for many of these ETFs!

Until next time,

Mike Larson