Established in 2007, the DB U.S. Dollar Index Bullish Fund (UUP) suffered middling returns until after the third quarter of 2014, when strength in the dollar led it to major gains over the following year and change. The UUP is designed to track the Deutsche Bank Long United States Dollar Futures Index by creating long positions in dollar-exchange contracts. This fund mostly serves as a hedge or for diversified currency speculation.
There are six foreign currencies pitted against the U.S. dollar in the UUP strategy: the British pound sterling, the Canadian dollar, the Swiss franc, the Swedish krona, the Japanese yen and the euro. All of these currencies are attached to mature, developed markets with relatively stable monetary policies. Ideally, exchange contracts denominated in these currencies will prove less volatile and more predictable than many other relationships in the foreign exchange market.
Simply put, PowerShares designed UUP to replicate the performance of an investor being long in the U.S. dollar against all six of the above-listed currencies simultaneously. It's a bet on a strong dollar.
The master fund for UUP enters into futures contracts strategically, hoping to mirror the excess return (or long) index of the USDX over time. Additional interest income is generated from U.S. Treasury obligations and other high-quality fixed income investments.
It is very important to understand the difference between the PowerShares DB U.S. Dollar Index Bullish Fund (which is an ETF) and the PowerShares DB US Dollar Index Trust (which is a trust). This article addresses the ETF.
Characteristics
The Bank of New York Mellon is the administrator for UUP and its associated master fund. Traditionally, UUP follows a two-to-one futures ratio; it tends to be long about 200%.
Because of its futures-focused nature, the UUP will seem strange to ETF investors who aren't used to futures contracts or the forex market. The fund can be relatively high-cost and is actively managed; it carries an expense ratio above 0.8%. This ratio does not include any costs or fees associated with a broker.
UUP only holds futures contracts in currencies and short-term, high-quality fixed income securities. There are no equity positions in this ETF, and 100% of its portfolio is considered cash or cash equivalents.
Suitability and Recommendations
Interest in PowerShares' UUP increased once the U.S. dollar showed surprising strength against foreign currencies in 2013-2015. This was buoyed by faulty recovery in the eurozone, debt problems across the world and less-than-stellar growth in China. However, investors need to keep an eye on the risks of investing through currency futures.
Even though UUP is technically considered an equity and trades on exchanges like any other ETF, its underlying portfolio is dominated by currency futures. This means that the risks associated with those contracts are captured by the fund as well. Unless an investors is relying on UUP to serve as a hedge against other currency bets, this should never be more than a satellite holding.
Many ETFs are used as passive buy-and-hold investments; UUP is not one of these ETFs. Instead, UUP is a short-term and technical investment vehicle. Currencies are speculative and are almost never long-term winners. UUP itself has a lifetime beta of nearly -0.5.
One potential use of UUP would be to protect a larger stock portfolio against the threat of deflation. Deflation helps consumers and wage-earners by making their dollars more valuable, but it tends to sap away at stock prices. UUP would perform well in a deflationary environment.
All in all, UUP is best-suited for currency traders, hedgers and market risk-takers. This is not a viable long-term investment option. Additionally, everyday ETF investors should take the time to understand currencies and futures contracts before deciding to invest in UUP.
