With the U.S. dollar pulling back, investors should take a second look at exchange traded funds that track larger U.S. companies with a greater international footprint.
Dubravko Lakos-Bujas, JPMorgan Chase & Co.’s chief U.S. equity strategist, argues that the dollar’s weakness could revive shares of multinational companies that generate most of their sales overseas, reports David Wilson for Bloomberg.
While the Dollar Spot Index dipped as much as 4.6% from a record on March 13, JPMorgan’s U.S. multinationals basket of 37 S&P 500 Index companies that generate over 50% of revenue overseas has gained 11%. Multinationals have typically outperformed when the dollar falls, and vice versa – the weaker dollar makes it cheaper for foreign consumers to purchase U.S. goods.
“U.S. dollar valuation is rich,” Lakos-Bujas said in a report, pointing to potential further weakness as one reason to favor multinationals over domestic companies.
Consequently, ETF investors who also believe a weaker USD could help prop up larger companies can focus on large- and mega-cap ETFs. For instance, the SDPR Dow Jones Industrial Average ETF’s (NYSEArca: DIA), which tracks the Dow Jones Industrial Average, includes a 90.3% tilt toward mega-cap stocks and 9.7% in large-caps. DIA includes prominent global brands like International Business Machines (NYSE: IBM) 6.4%, 3M (NYSE: MMM) 5.9% and Apple (NasdaqGS: AAPL) 4.7%. [Apple Brings Some Sexy to the Dow ETF]
Investors can also track S&P 500 names through the SPDR S&P 500 ETF (NYSEArca: SPY), Vanguard 500 Index (NYSEArca: VOO) and iShares Core S&P 500 ETF (NYSEArca: IVV). The three S&P 500 ETFs include similar weights, including about 52% mega-caps, 35% large-caps and 12% mid-caps.
However, potential investor should be aware that SPY is structured as a unit investment trust and not a regulated investment company like other funds. Consequently, the structure prevents SPY from reinvesting dividends, holding securities that are not included in the index, like futures, or engage in securities lending. Investors may consider IVV due to its cheap 0.07% expense ratio, compared to SPY’s 0.09% expense ratio, and the iShares ETF’s better job matching the underlying index. Additionally, VOO is the cheapest of the bunch with a 0.05% expense ratio. Institutional investors, though, have stuck with SPY because of its robust liquidity and high daily volume. [Comparing Popular S&P 500 ETF Options]
Moreover, the Vanguard Mega Cap ETF (NYSEArca: MGC) andiShares S&P 100 ETF (NYSEArca: OEF) both target the largest U.S. companies. MGC includes 59.5% mega-caps and 38.2% large-caps. OEF holds 83.3% mega-caps and 16.7% large-caps.
For more information on large multinational companies, visit our large-cap category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of SPY.