ETF Talk : Forecasting a Dollar Turnaround

The value of the U.S. dollar has been hammered in recent months, and observers — me included — feel that the greenback’s decline is bound to run out of steam sooner rather than later. When this happens, investors will have a chance to profit by riding the U.S. dollar higher. Of course, nobody knows yet when a reversal of fortune for the dollar will take place, but when it does, you’ll want to be prepared.

One fund that lets investors bet on the recovery of the U.S. dollar is the PowerShares DB US Dollar Index Bullish (UUP). Investors also may view the UUP as a hedge against a falling stock market and a slowdown in the economy. UUP is an exchange-traded fund (ETF) that gains in value as the value of the U.S. dollar climbs and rival foreign currencies fall. In a nutshell, UUP is a bet in favor of a rising dollar. 

For those of you who may be eyeing an investment in the dollar, UUP could be a good way for you to hedge against what I suspect will be asset deflation in the equities and a decline in prices stemming from a declining economy. However, such an investment only should involve a small portion of your assets, since it is meant to serve as a hedge against a potential decline in the market and in the economy. If you opt to invest in the dollar, do not make it a primary holding in your portfolio. You also will want to put a stop loss on this position, if you choose to buy it. In addition, only risk the amount that you are prepared to lose, since a bet on the U.S. dollar right now is a gamble that the current downward trend of the greenback will reverse.

I actually recommended UUP in my investment newsletters recently, but primarily as a hedge, and only for a very small portion of each respective portfolio. If you want a hedge in your portfolio as well, investing in the U.S. dollar is a good way to mitigate the potential damage from a market drop.

A final warning on any dollar bet is that if you are not willing to place a stop loss on your position, don’t even think about buying UUP. I cannot stress enough that a hedge position such as this mostly serves as insurance in the event the market comes down and the economy continues faltering. If the idea of hedging seems a bit of a stretch to you, you’re probably better off avoiding such investments.

For those of you who want specific advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs. To send me your questions, please click here. You may see your question answered in a future ETF Talk.