As the U.S. dollar strengthens against a basket of foreign currencies, large-cap companies and asset category-related exchange traded funds could be exposed to currency risks.
According to S&P Dow Jones Indices, S&P 500 companies generated 52.2% of their revenue in the U.S. last year, down from 53.7% in 2013 and 53.4% in 2012, reports Steve Goldstein for MarketWatch.
Consequently, almost half of S&P 500 companies’ revenue stream comes from overseas markets. Using S&P and FactSet data, MarketWatch estimated that about 0.4% is generated from Mexico, 0.2% from Australia, 4.1% from South America, 6.9% from Canada, 7.7% from Africa, 13.9% from Europe and 14.3% from Asia.
Consequently, the breakdown should give investors a general sense of how their S&P 500 ETF investments are exposed to currency risks.
Year-to-date, the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO) have gained about 2.3%.
However, if the U.S. dollar continues to appreciate, which many believe will happen as the Federal Reserve sets to hike rates while other foreign central banks implement loose monetary policies, S&P 500 companies may see overseas revenues shrink. A weaker foreign currency means that profits are lower when converted back into U.S. dollar terms.
Alternatively, investors can take a look at smaller U.S. companies that focus on the domestic market, so currency risks may be limited.
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, which include a 68.7% tilt toward mid-caps and 31.2% to small-caps. [Interested in the U.S.? Look to ETFs that Target Smaller Companies.]
The Vanguard Mid-Cap ETF (NYSEArca: VO) provides an alternative as it follows the CRSP US Mid Cap Index, which leans towards larger companies with a 79.9% tilt toward mid-caps and 19.2% in large-caps.
Additionally, the Schwab US Mid-Cap ETF (NYSEArca: SCHM), which follows the Dow Jones U.S. Mid-Cap Total Stock Market Index, includes a 86.0% position in mid-caps and 11.1% in small-caps.
Investors can also look at small-cap ETFs, including the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), Vanguard Small Cap ETF (NYSEArca: VB) and iShares Russell 2000 ETF (NYSEArca: IWM).
For more information on the S&P 500, visit our S&P 500 category.
Full disclosure: Tom Lydon’s clients own shares of IVV.
Max Chen contributed to this article.