The dollar is on a tear. But if you are considering a direct
bet on a rising greenback, it could pay to think twice. The WSJ Dollar Index
hit a five-year high on Nov. 6, and it is up 8.2% in 2014, through Wednesday.
The index gauges the dollar’s performance against a basket of currencies,
including the euro and the yen.
The dollar is gaining strength as the Federal Reserve inches
toward raising interest rates perhaps as soon as next year. Central banks in
Europe and Japan, by contrast, still are trying to boost growth with looser
monetary policies. The dollar hit a seven-year high against the yen on Tuesday,
less than two weeks after the Bank of Japan announced an expanded
stimulus plan.
U.S. stocks also stand to benefit if global investors are
drawn by an improving U.S. economy and discouraged by often lackluster
prospects at home. But betting on funds that are designed to profit from a
rising dollar can be a risky move, experts say. Currencies can be volatile and
their swings can be unpredictable, which means that investors could end up
losing money even if U.S. stocks keep rising for other reasons.
There are only a handful of funds that focus exclusively on
dollar appreciation. Three of the largest together hold nearly $1.2 billion. The
dollar’s rally has sparked strong interest in those funds from investors, who
have pumped more than $405 million into the funds this year, through Oct.
31—much of it in recent weeks—according to Chicago-based investment researcher
Morningstar.
These types of funds generally attract investor dollars when
currency values are particularly volatile, taking in nearly $1 billion in 2011,
when concerns about sovereign debts in the eurozone spiked. The funds have some virtues, including
offering a potential buffer against falling stock prices.
Another ETF that bets on the greenback is the WisdomTree
Bloomberg U.S. Dollar Bullish Fund , which has $157 million in assets. The
fund is up 6.1% this year, and charges 0.50% in fees.
The third such fund is the ProFunds Rising U.S.
Dollar fund. The $63 million mutual fund is up 7% this year, through
Wednesday. Annual fees are 1.79% and there is a minimum $15,000 investment.
Investors in such funds, however, risk getting blindsided by
events that can send currency values tumbling, and they don’t collect
dividends, as they do with stocks, to compensate for potential losses. It also
is difficult to determine whether the dollar might be overvalued relative to
other currencies since it has no revenues or earnings against which to measure
its price.
The rally in the dollar could fizzle, for example. The U.S.
currency is currently acting as a haven for investors worried about global
crises, for example, but those concerns may wane. Until recently, the dollar
had been losing ground against other currencies for years, as U.S. interest
rates remained low.
If the U.S. economy continues to rebound, inflation stays
low and the Fed’s policy moves don’t curb the stock rally, the returns on
equities could be greater than the gains in the dollar. So investors focused on
long-term growth may not need a currency fund.
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