The recent surge in the U.S. dollar has lured some strategic investors back into two exchange traded funds designed to benefit from the greenback rising against key counterpart currencies. The new year is less than two weeks old, but the Invesco DB U.S. Dollar Index Bullish Fund (UUP) has already raked in $174 million year to date. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) is not far behind at about $126 million. Those inflows represent more than a quarter of the total assets for each fund. Both ETFs, which are more than a decade old, have a total return of more than 13% over the past year. The dollar rally There are various ways to measure the dollar against different baskets of currencies. One of the most common is the ICE U.S. Dollar Index (DXY) , which has rallied 100.78 at the end of September to higher than 109 this week. The DXY took another leg higher on Friday morning after a stronger-than-expected jobs report . .DXY 6M mountain The dollar index has been trending higher in recent months and was above 109 on Friday. On an individual pair level, the U.S. dollar has strengthened against the euro , Japanese yen and Australian dollar , among others, in recent months. “It moved about two standard deviations, this change in dollar strength, from October to year end. And we haven’t seen a move like that in at least 10 years,” said Kathy Kriskey, Invesco’s commodities and digital assets ETF strategist, told CNBC. There are many factors that can impact the value of one currency versus another, but broadly speaking, two things that move currency markets are interest rate differentials between countries — and tariffs. Since September, traders have dialed back their expectations for rate cuts from the Federal Reserve, and Donald Trump won the presidential election with a platform that calls for higher tariffs across the board. How the ETFs work The funds from Invesco and WisdomTree aim for the same outcome — benefitting from a rising dollar — but take different approaches. Invesco’s UUP gets its exposure to the dollar by purchasing futures contracts on the US Dollar Index, which measures the greenback against six other currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. WisdomTree’s USDU, however, uses a broader dollar index from Bloomberg. And instead of futures contracts on the index, USDU consists of forward contracts on the individual currency pairs. The futures contracts are on a quarterly basis, while USDU uses one-month forwards. Another thing for investors to keep in mind is that both of these funds regularly distribute cash back to shareholders, but they may be taxed differently. Both funds hold Treasury bonds as collateral against their derivatives positions. USDU can also have some extra yield from the way the forwards contracts are structured. Another key distinction is that the UUP is a 1933 Act product, so it sends out K-1 and K-3 tax forms, which some financial advisors try to avoid. The USDU is a 1940 Act product, so its distributions are similar to what is seen in most ETFs. Invesco categorizes the distributions for its fund as return of capital, while WisdomTree labels the USDU payouts as ordinary income. The tax effects of these differences can very depending on the investor and the account type where ETFs are held.
