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) - Get Report 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.
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'srate 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) - Get Report. 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.
The dollar's rise has also fueled the ascent of currency-hedged ETFs. In addition to tracking equity indexes, currency hedged ETFs hold short positions in foreign currencies, such as the euro or yen. That combination gives currency hedged ETFs added potency as currencies fall and stocks rise in export-heavy countries, such as Germany and Japan.
Led by the WisdomTree Europe Hedged Equity Fund (HEDJ) - Get Reportand the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) - Get Report, currency-hedged ETFs saw combined first-quarter inflows of $26.8 billion, according to BlackRock data.
HEDJ tracks the WisdomTree Europe Hedged Equity Index. That index is designed not only to profit from declines in the euro, but it also delivers to HEDJ investors exposure to dividend-paying exporters based throughout the Eurozone. Germany and France, the eurozone's two largest economies, combine for over 51% of HEDJ's geographic weight.
DBEF is the currency-hedged answer to the widely followed MSCI EAFE Index. Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom are the countries eligible for inclusion in the ETF.
Seven of DBEF's top nine country weights are nations that have lowered interest rates this year.
"Even though the U.S. dollar has retreated notably from its mid-March highs, interest and trading activity continues to be pronounced" in currency-hedged ETFs that let investors take advantage of specific areas of the equity market while avoiding the risk from a local currency, such as the yen, weakening against the greenback, Weisbruch said.
Europe- and EAFE-linked currency-hedged ETFs (namely HEDJ and DBEF) continue to be the most popular in terms of steady inflow.
"What we question is, 'Will the inflows into currency hedged ETFs abate if the U.S. dollar simply stops going up as it has in the past week or so?''' Weisbruch said. ''The issue with that type of thinking is that the recent decline in the U.S. dollar is over a short time period, so it is likely too early to call the end of larger inflows into currency hedged ETFs just yet."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.