As the U.S. dollar strengthens against foreign currencies and hurts Corporate America’s overseas profits, equity investors should consider small- and mid-cap exchange traded funds that track companies doing more business at home.
For instance, the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) and SPDR S&P MidCap 400 ETF (NYSEArca: MDY) both track the S&P MidCap 400 Index, with about 71% mid-cap exposure and 28% in small-caps. The Vanguard Mid-Cap ETF (NYSEArca: VO) provides an alternative as it follows the CRSP US Mid Cap Index, but the it also includes a 20.2% weight in large-caps, along with 79.0% mid-caps. [Mid-Cap ETFs Take the Lead]
To access the smaller segment of the market, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) reflects the S&P SmallCap 600, which includes a 68% tilt toward small-caps and 30.1% toward micro-caps. The Vanguard Small Cap ETF (NYSEArca: VB) follows the CRSP US Small Cap Index, which also covers a wider market capitalization, including a 43.7% position in mid-caps and 47.0% in small-caps. Lastly, the widely observed iShares Russell 2000 ETF (NYSEArca: IWM) tracks the Russell 2000, with a 11.0% position in mid-caps, 59.1% in small-caps and 29.9% in micro-caps. [Small-Cap ETFs: Look Beyond the Russell 2000]
As the U.S. dollar continues to strengthen against foreign currencies, large-cap companies with overseas revenue streams could see profits diminish – countries that do business overseas will see a lower overall revenue when repatriating a weaker foreign currency-denominated profit to a stronger USD.
For instance, General Motors (NYSE: GM) said foreign exchange risks shaved $1.8 billion off first-quarter revenue, Procter & Gamble (NYSE: PG) expects full year sales to fall 5% or 6% due to the strong USD and 3M (NYSE: MMM) projects foreign currency impact to cut earnings by 35 cents to 40 cents per share, reports Ciara Linnane for MarketWatch.
Wall Street strategist Nicholas Colas of Convergex argues that first-quarter earnings and slowing revenue growth among the bigger players are a concern, reports Michelle Fox for CNBC. [Strong U.S. Dollar Could Pressure S&P 500 Earnings, ETFs]