The Buck Starts Here With These Currency ETFs

The U.S. dollar, according to bond expert Jeffrey Gundlach, is “the place to be.”

The dollar has been strengthening as the Federal Reserve's asset-purchase program winds down. At the same time, developed markets in the Euro Zone and Japan are cranking up their own economic stimulus efforts. All of this has the Deutsche Bank U.S. Dollar Index up 9 percent this year, after five straight years of negative returns -- and DoubleLine's Gundlach thinks the dollar will go on to top its 2009 highs.

Any investor with money in the S&P 500 Index already has exposure to the dollar. But a number of exchange-traded funds offer ways to make a more concentrated bet on a stronger greenback.

Currency ETFs

While there are 39 currency ETFs, only two attempt to benefit from a strong dollar. The PowerShares DB US Dollar Bullish Fund (UUP) is the oldest and most popular, with $963 million in assets. It makes its dollar play by betting against a basket of developed-market currencies. Its biggest bet is against the euro, with a 57 percent weight; the next biggest bets are against the Japanese yen (13 percent) and the British pound (11 percent). UUP is up 9 percent so far this year, and charges 0.80 percent of assets annually.

Currency ETFs are a tiny blip on the ETF map, with only $3.6 billion in assets out of the $1.9 trillion total in ETFs. But they offer a legitimate diversification benefit -- they tend to zig when other parts of your portfolio zag. And while investing in ETFs that use derivatives -- as these two do by shorting futures contracts -- calls for caution, the ETFs are both only a third as volatile as U.S. stocks.

Currency-Hedged Equity ETFs
Investors can also find currency-hedged equity ETFs. These can be helpful when the dollar is strong relative to other currencies. That's because a portfolio's international allocation can get out of whack when all of its foreign stock market gains get converted back into dollars, and fewer of them.
This currency conversion can be a boost or a drag. This year it has been a total drag. In Europe, for example, the currency effect is costing U.S. investors 9 percent of return. Look at the WisdomTree European Hedged Equity ETF (HEDJ). It tracks Euro Zone stocks and hedges out the effect of the euro. HEDJ is up 3 percent this year. Compare that with the 8 percent loss of the. source