Our latest defensive recommendation is an exchange-traded fund composed solely of long futures contracts that tracks the price and yield performance of the Deutsche Bank Long US Dollar Futures index, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.
PowerShares DB US Dollar ETF (UUP) is designed to replicate the performance of the US dollar against the euro (58%), Japanese yen (14%), British pound (12%), Canadian dollar (9%), Swedish krona (4%), and Swiss franc (3%).
If the ongoing conflicts in the Middle East continue to persist, the European economy will suffer, the euro will slide, and the US dollar will rise. In addition, the uncertainty around the world could bring intense US stock market volatility during the next several quarters.
Based on past performance, UUP’s stock price will likely increase if the US stock market declines or becomes more volatile.
The PowerShares US Dollar ETF also offers protection against devalued sales and earnings from US corporations operating in foreign countries.
Recently, international corporations are taking accounting charges when converting local foreign currencies into US dollars for sales and earnings created overseas. Owning UUP will partially offset weak foreign currencies that negatively affect these US companies.
The US dollar and UUP will continue to move higher, because the US economy will likely remain stronger than the European and Japanese economies. Your purchase of UUP will neutralize the wild gyrations of common stocks and will offer protection against a possible fall in stock and bond prices.
UUP does not pay a dividend but the shares are currently selling at a very small discount to their net asset value. Total ETF expenses are a reasonable 0.80% of total value. I expect UUP to reach my minimum sell price target of $29.00 within two years.
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