One approach that has been delivering positive results for more than a decade is to leverage the “smart” in smart beta—focusing on momentum and trend—while adding ADRs to the mix to include international stocks with lower transaction fees. The benefits are twofold. First, not only does smart beta offer your clients an alternative to passive index investing, but because it focuses on momentum and trends, it’s a powerful approach that “lets the winners run” while weeding out stocks that are losing momentum or beginning their downward descent. This helps minimize the increased risk that many investors have learned to associate with non-US markets. Second, leveraging ADRs not only opens the door to foreign stocks by eliminating international transaction fees, but because they’re denominated in US dollars, they actually increase in value as the strength of the dollar wanes.
But the dollar is strong…right? At the moment, yes. But just as it’s wise to look at momentum and trends in stocks, taking a close look at how the dollar is trending is important as well. This past January, the dollar index hit its highest point in a decade. It’s precisely why you got online and booked that trip to Italy. But the tide appears to be turning. Last week the dollar index fell to its weakest level since January 2015, and indicators are pointing to potential continued weakness. Historically, a falling US dollar tends to have a negative impact on domestic returns and a positive impact on non-US returns.
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