Key Takeaways
- The US dollar has regained its role as a safe-haven asset due to the war in Iran.
- For European investors looking to benefit from the US dollar’s recovery, experts suggest using ultra short-term bond strategies.
- Two ETFs from Pimco and JP Morgan, both actively managed, are among those that Morningstar analysts rate positively.
The US dollar is being boosted by investors’ search for safe-haven assets as the crisis in the Middle East continues, pushing up oil prices and increasing fears about the implications for inflation and economic growth.
The dollar has strengthened against the euro since the start of the Iran war. Before Feb. 28, the exchange rate stood at USD 1.18 while it now hovers around USD 1.15.
“The resurgence of conflict in the Middle East has immediately redirected financial flows toward the US dollar, restoring its role as a ‘safe-haven asset’ just as the narrative of de-dollarization seemed to be gaining ground,” says Giacomo Calef, Italy country head at NS Partners.
Why Is USD a Safe-Haven Asset Again?
The dollar still accounts for a dominant share of global official reserves, amounting to about 56% of the total, according to data from the International Monetary Fund. Plus, with over half international payments denominated in US dollars, it “explains why, during periods of systemic tension, capital quickly converges on the US currency,” says Calef.
Conversely, the euro is being penalized by Europe’s dependence on crude oil supplies passing through the Strait of Hormuz, which is currently blocked. According to Ebury analysts, the euro has weakened against the US dollar “in response to not only expectations that the Iran war will drag on for weeks to come, but that the Strait of Hormuz will remain effectively impassable for much longer than anticipated.”
A great deal of uncertainty still surrounds the duration of the war in Iran and its future developments. If it were to end soon, recent fluctuations in the dollar could stabilize. But if the conflict drags on, these fluctuations could continue, “affecting not only commodity prices but also the trajectory of monetary policy,” says NS Partners’ Calef.
8 ETFs to Ride the US Dollar’s Recovery
For European investors looking to gain exposure to the US dollar’s recovery, experts suggest using short-term products. “Given the volatility in markets, particularly around USD valuation, I’d focus on the very short term part of the curve,” says José Garcia-Zarate, senior principal of Morningstar’s manager research team. He says the goal here is to profit from the greenback’s recovery without taking on other risks typical of the bond market.
One way to do this is to invest in USD ultra short-term bond ETFs. There are a number of these with a positive Morningstar Medalist Rating—Bronze, Silver, or Gold—domiciled in Europe with at least EUR 100 million in assets under management. The table below lists one share class for each fund, although different classes with varying fee structures and Morningstar ratings may be available locally. Returns are in euros as of March 18.
The Best USD Ultra Short-Term Bond ETFs
PIMCO ETFs PLC — US Dollar Short Maturity UCITS ETF
Over the past year, the actively managed PIMCO ETFs PLC — US Dollar Short Maturity UCITS ETF fell 0.78%, while the average USD ultra short-term bond fund lost 1.11%. The fund placed in the 19th percentile for performance and edged out its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.35 percentage points. The EUR 3.2 billion fund has climbed 3.46% year to date, outperforming the average fund in its category, which rose 3.25%. The fund holds a Gold Medalist Rating.
JPMorgan ETFs (Ireland) ICAV—USD Ultra-Short Income Active UCITS ETF
The EUR 861 million JPMorgan ETFs (Ireland) ICAV—USD Ultra-Short Income Active UCITS ETF fell 0.82% over the past year. The loss on the actively managed fund edged out the 1.11% loss on the average fund in the USD ultra short-term bond category, leaving it in the 23rd percentile for performance. The fund edged out its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.31 percentage points. Year to date, the JPMorgan fund rose 3.22%, while the average fund in its category rose 3.25%. The ETF has a Gold Medalist Rating.
Amundi Index Solutions—Amundi US Treasury Bond 0-1Y UCITS ETF
Over the past year, the passively managed Amundi Index Solutions—Amundi US Treasury Bond 0-1Y UCITS ETF fell 1.27%, while the average USD ultra short-term bond fund lost 1.11%. The fund placed in the 90th percentile for performance and fell further than its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.14 percentage points. The EUR 1.2 billion fund has climbed 3.3% year to date, performing roughly in line with the average fund in its category, which rose 3.25%. The fund holds a Silver Medalist Rating.
Vanguard US Treasury 0-1 Year Bond UCITS ETF
The passively managed Vanguard US Treasury 0-1 Year Bond UCITS ETF lost 1.25% over the past year, falling further than the average fund in the USD ultra short-term bond category, which fell 1.11%. The fund placed in the 78th percentile for performance and fell further than its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.12 percentage points. The EUR 6 billion fund has gained 3.3% year to date, while the average fund in its category is up 3.25%. The fund holds a Silver Medalist Rating
Xtrackers US Treasuries Ultrashort Bond UCITS ETF
The EUR 3.6 billion Xtrackers US Treasuries Ultrashort Bond UCITS ETF fell 1.28% over the past year. The loss on the passively managed fund was worse than the 1.11% loss on the average fund in the USD ultra short-term bond category, leaving it in the 90th percentile for performance. The fund fell further than its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.15 percentage points. Year to date, the Xtrackers fund rose 3.29%, while the average fund in its category rose 3.25%. The ETF has a Bronze Medalist Rating.
iShares $ Ultrashort Bond UCITS ETF
The passively managed iShares $ Ultrashort Bond UCITS ETF lost 0.97% over the past year, falling less than the average fund in the USD ultra short-term bond category, which fell 1.11%. The fund placed in the 38th percentile for performance and edged out its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.16 percentage points. The EUR 2 billion fund has gained 3.29% year to date, while the average fund in its category is up 3.25%. The fund has a Bronze Medalist Rating.
State Street SPDR Bloomberg 1-3 Month T-Bill UCITS ETF Acc
Over the past year, the passively managed State Street SPDR Bloomberg 1-3 Month T-Bill UCITS ETF Acc fell 1.23%, while the average USD ultra short-term bond fund lost 1.11%. The fund placed in the 68th percentile for performance and fell further than its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.1 percentage points. The EUR 740 million fund has climbed 3.36% year to date, performing roughly in line with the average fund in its category, which rose 3.25%. The ETF has a Bronze Medalist Rating.
iShares $ Treasury Bond 0-1yr UCITS ETF
The EUR 21.6 billion iShares $ Treasury Bond 0-1yr UCITS ETF fell 1.21% over the past year. The loss on the passively managed fund was worse than the 1.11% loss on the average fund in the USD ultra short-term bond category, leaving it in the 56th percentile for performance. The fund fell further than its benchmark, the Morningstar US 0-1 Year Core Bond ex-Yankee Index, by 0.08 percentage points. Year to date, the iShares fund rose 3.31%, while the average fund in its category rose 3.25%. The ETF has a Bronze Medalist Rating.
