Down Dollar Helps Everybody

How do changes in the value of the dollar affect U.S. companies and U.S. exchange-traded funds? It is not as straightforward as it looks.

First, a falling dollar raises the dollar value of foreign sales. Big U.S. multinationals receive roughly half of their total sales from overseas. For S&P 500 companies, it is about 30% of their sales overseas compared with 15% for smaller companies in the Russell 2000 Index. When the dollar weakens, the value of those sales grows. Hence international “mega-cap” companies, laggards for years, have recently outperformed.

n short, a weak dollar im­proves the case for big U.S. stocks.

But look at Europe, the stronger euro has not hurt their share prices even though they are even more international in terms of sales than most American firms. One of the reasons European ETFs are doing so well this year is the stronger euro. Remember, international ETFs are not hedged against the U.S. dollar so a weaker dollar will help their returns.

f the 19 emerging market ETFs tracked by ETFXRAY.com, only one is increasing in value. It is the iShares MSCI Mexico Index Fund (amex: EWW). The other 17 positions have reversed into columns of O’s.

The iShares Dow Jones U.S. Transportation Index (amex: IYT) has also recently reversed negatively. It has hit $94 twice this year only to fall back, once in February and again in April. In three years IYT has appreciated 78% for an annualized average gain of 26%. Despite the exceptional growth there have been periods of correction such as last May through September when the ETF gave up 17% in value.

HSBC (nyse: HBC - news - people ) is a leading bank in many financial exchange-traded funds such as the Wisdom Tree Int’l Financials ETF (nyse: DRF) where it represents 7.3% of the ETF basket. Formerly known as the Hong Kong Shanghai Banking Corporation, it is a global powerhouse and earlier this year passed Citigroup (nyse: C - news - people ) as the largest bank in the world in terms of market value. This week a second Gulf investor appeared on HSBC’s share register in less than two weeks on Tuesday as DIC Asset Management, part of Dubai International Capital, said it had bought a “substantial” stake in the bank.

HSBC’s expansion strategy in China has also recently been dealt a blow by the reclassification of its Chinese partner into a significant state-owned bank, a change that would protect the Chinese lender from a foreign takeover. HSBC paid $1.75 billion three years ago for 19.9% of the Bank of Communications--the biggest stake allowed for a foreign investor under then existing Chinese rules.

According EPFR Global, money returned to U.S. equity funds during the fourth week of April as the benchmark Dow Jones index posted a series of new record highs on the back of a better than expected first-quarter earnings season. But uncertainty about China’s response to economic growth that clearly exceeds official targets may have dampened flows into emerging markets funds. And, after three weeks of solid gains, investors pulled significant amounts of money out of Western European equity funds.

The $3.77 billion that flowed into U.S. equity funds during the week ending April 25 pulled these funds back into positive territory year-to-date. Small- and large-cap blend exchange-traded funds--passively managed funds which mix growth and value investment styles--accounted for the lion’s share of the fresh money that came in during the week.

In the case of the Western European funds, investors decided to lock in profits after this fund group has put in a 9% performance gain since March 22. The perception that mergers and acquisitions activity rather than fundamentals were driving recent gains in major European equity markets triggered some of the $1.01 billion worth of redemptions from these funds, as did the growing concern about Spain’s property bubble.

Finally, Japan ETFs and funds have been hit with net redemptions seven of the past eight weeks and are once again in negative territory year to date.