Making Money Alert
ETF Talk: Let Uncle Sam Protect You in a Crisis
09/28/2011
When the going gets tough, the tough go for dollars.
The PowerShares DB US Dollar Bullish (UUP) is an exchange-traded fund (ETF) that lets you profit when the value of the U.S. dollar strengthens against other currencies. UUP, based on the Deutsche Bank Long US Dollar Index (USDX) Futures Index (DB Long USD Futures Index) and managed by DB Commodity Services LLC, typically offers a place for risk-averse investors to shield a portion of their funds in times of international financial crises. With the continuing sovereign debt problems in Europe and weakening economic conditions virtually throughout the world, such a situation is occurring now.
The fund is designed to provide an investment return that corresponds generally to the performance of the U.S. dollar, compared to other major currencies, before factoring in the fund’s modest expenses. The ETF seeks to profit from the rising value of long USDX futures contracts. Those futures contracts are designed to replicate the performance of going long in the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
A fascinating trend has started to emerge during the past week. Equities and precious metals tumbled after the Federal Reserve announced that it would sell short-term debt to buy long-term debt. With a troika of the European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB) trying to solve Europe’s sovereign debt issues amid heightening fear about a global economic slowdown, investors poured into the U.S. dollar -- traditionally the world’s safest currency during an international crisis.
This flight to quality is an indication that investors clearly are concerned about what may happen in the weeks and months ahead. A big appeal of currency investments such as UUP is that they can profit, while the rest of the market tanks. Keep in mind that currency investing is a zero-sum game, so someone must lose on a trade to allow you to win. A plus to currency investing is that the trends typically do not reverse quickly. Since currency valuations tend to move slowly, there is less volatility in these holdings, compared to many others.
Another reason why we are taking a look at UUP is because many analysts on the street are predicting parity between the U.S. dollar and the euro in the coming months. If that happens, the U.S. dollar would rise in value nearly 35 cents compared to the euro. This would mean significant gains for UUP, if the predictions hold true. UUP recently has tracked above its 200-day moving average, a good indicator that the downward pressure the dollar has seen through most of this year may be subsiding. I actually recommended UUP to subscribers of my Successful Investing newsletter recently and I am pleased to report that the position already has moved up, despite the market’s pullback.
As always, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. I am happy to answer your questions, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.