The appreciating U.S. dollar is taking its toll on larger companies’ revenue with significant overseas exposure. On the other hand, mid- and small-cap exchange traded funds track companies that expand with the growing U.S. economy.
After companies like Procter & Gamble (NYSE: PG) and Pfizer (NYSE: PFE) announced disappointing earnings results due the stronger greenback and its effect on overseas sales, the markets pulled back, but the slide in mid- and small-cap ETFs was less pronounced than large-caps.
On Tuesday, the iShares Russell 2000 ETF (NYSEArca: IWM) dipped 0.2%, Vanguard Small Cap ETF (NYSEArca: VB) was down 0.3% and WisdomTree SmallCap Dividend Fund (NYSEArca: DES) was 0.3% lower. [Smart-Beta, Small-Cap ETFs Could Outperform]
Meanwhile, the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) fell 0.5%, SPDR S&P MidCap 400 ETF (NYSEArca: MDY) decreased 0.5% and Vanguard Mid-Cap ETF (NYSEArca: VO) declined 0.4% on Tuesday. [An ETF to Capture Middle-Capitalization Companies]
In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) retreated 0.9%.
On Tuesday, P&G’s Chief Executive Officer A.G. Lafley argued that the “unprecedented” foreign-exchange rate fluctuations diminished sales by 5 percentage points, which caused profits to miss analysts’ estimates for the quarter ended Dec. 31, reports Cecile Daurat for Bloomberg.
DuPont, Pfizer and Bristol-Myers Squibb (NYSE: BMY) also announced annual forecasts that missed predictions, partly due to the stronger USD.
The stronger USD, which is now hovering near its highest since September 2003, is expected to diminish profits for large companies that do business overseas, and some strategists contend that the strengthening currency and low energy prices could constrain quarterly S&P 500 earnings growth. [Strong U.S. Dollar Could Pressure S&P 500 Earnings, ETFs]
Specifically, the strong greenback makes American goods and services more expensive overseas. [Tech ETFs with Global Footprints at Risk]
Microsoft (NasdaqGS: MSFT) also revealed that overseas sales are being pressured by the stronger dollar.
“The one sector that is arguably the most exposed to the rising dollar is technology as the sector is by far the best represented among the group of shares with the least North American sales exposure,” Simon Colvin, an analyst at Markit, said in a report.
Alternatively, investors can turn to mid- and small-cap stocks, which focus more on the domestic economy, to capture the continued growth in the U.S. market.
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Max Chen contributed to this article. Tom Lydon’s clients own shares of IWM.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.