Strong Dollar Could Hurt Mega-Cap ETFs | ETF Trends

So far, so good. Of the S&P 500 components that have reported third-quarter earnings, multi-national companies revealed a limited effect from a strong U.S. dollar on overseas revenue. However, exchange traded funds that track large multi-national U.S. companies could begin to feel the heat over the fourth quarter.

Among companies that generate at least 30% of their sales overseas, 60% have beat analysts earnings expectations, reports Alexandra Scaggs for the Wall Street Journal.

However, Bank of America Merrill Lynch analysts warn that the strengthening U.S. dollar will begin to weigh on returns starting this quarter. The Dollar Index has gained 6.7% since the start of the year.

“A stronger dollar may have a bigger impact on 4Q and 2015 earnings,” BofAML analysts led by Savita Subramanian, the bank’s top U.S. stocks strategist, said in a note.

Many large, more established companies are globally diversified and have greater international exposure. Consequently, the stronger USD, or weaker overseas currencies, would make international revenue gains weaker when converted back into U.S. dollar terms. The weaker revenue stream as a result of the strong U.S. dollar could weigh on mega-cap ETFs that focus on these more established companies.

The Vanguard Mega Cap ETF (NYSEArca: MGC) tracks the largest 70% of the U.S. market by market capitalization and S&P while the iShares S&P 100 ETF (NYSEArca: OEF) focuses on the 100 largest stocks taken from the S&P 500. Over the past month, MGC has declined 1.7% and OEF has decreased 2.1%.