A weakening U.S. dollar is discreetly helping some ETFs to outperform their size during this earnings season, particularly those comprised of globally exposed American titans.
But before investors get caught up in the greenback-driven glow, experts caution: all that moves isn’t necessarily real growth.
The Dollar’s Slump And The ETF Sweet Spot
The U.S. dollar has fallen about 10% this year, battered by trade policy whiplash, debt worries, and decelerating growth, per a Reuters report. That weakness has boosted foreign earnings for multinational U.S. companies, and by proxy, juiced the payouts of ETFs that own them.
Industry ETFs such as the Vanguard Consumer Discretionary ETF (NYSE:VCR), SPDR Industrial Select Sector ETF (NYSE:XLI) and iShares U.S. Technology ETF (NYSE:IYW) are in the sweet spot. These funds allocate heavily to firms generating substantial revenue overseas, which are now profiting from favorable currency translation.
For instance, VCR component PepsiCo (NASDAQ:PEP) stated the dollar downturn assisted it in projecting a less-than-anticipated annual profit decline, the Reuters report noted. XLI component 3M (NYSE:MMM) reported a profit beat in Q2 with FX gains doing some heavy lifting.
Why the Market Isn’t Celebrating (Yet)
Even though FX is benefiting the bottom line, investors do not trust it. Wall Street typically discounts foreign exchange-driven earnings surprises as optical, not fundamental.
This is particularly applicable to ETF investors who might believe they’re surfing a trend, only to realize it’s all flash, no substance. Constant-currency beats, those FX-adjusted, tend to get more rewarded than FX-led ones, says Goldman Sachs.
What does it mean? Don’t expect a lift in earnings to be followed by a lift in ETF prices unless it’s preceded by actual demand growth.
When FX Becomes A Tailwind For ETFs
Still, the impact is real. Based on two decades of data, every 1% depreciation in the dollar improves S&P 500 EPS growth by about 0.6 percentage points, according to LSEG data cited in the Reuters report. That's not nothing, especially for ETFs tracking international-facing sectors.
IYW has experienced indirect support from names like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), which generate over half of their revenues from international locations.
Even thematic ETFs such as the Invesco International BuyBack Achievers ETF (NASDAQ:IPKW), which is skewed toward U.S. companies with aggressive foreign strategies, might gain if the dollar is weak.
ETFs To Watch If The Dollar Remains Soft
- VCR (Consumer Discretionary): Large global brands such as Amazon (NASDAQ:AMZN), Nike (NYSE:NKE), and Starbucks (NASDAQ:SBUX).
- XLI (Industrials): High exposure to cyclical multinationals with international sales.
- IYW (Technology): FX-bolstered cash flow machines such as Microsoft and Apple.
- SPY / VOO (S&P 500): Wide, but still ~38% international exposure.
- IPKW/ iShares International Select Dividend ETF (BATS:IDV): Dividend or buyback ETFs with heavy overseas tilts.
The Bottom Line
ETF holders could be quietly profiting from the decline of the greenback, but such gains can disappear as suddenly as they began. Most of these gains are less about consumer enthusiasm and more about currency arithmetic, and that makes all the difference when macro is choppy.
Appreciate the tailwind, by all means. But don’t confuse a currency flutter with a structural break.
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