Navigating Dollar Weakness: High-Conviction ETFs for Emerging Markets and Commodities

The U.S. dollar's decline in 2025 has reshaped global capital flows, creating a fertile ground for ETFs in emerging markets and commodities. As the DXY index fell 10.8% in the first half of the year, investors flocked to assets priced in weaker currencies and commodity-linked vehicles. This shift underscores a strategic opportunity for those seeking to capitalize on dollar weakness through high-conviction ETFs.

Emerging Markets: A Magnet for Dollar-Depreciation-Driven Capital

Emerging market (EM) equities have historically acted as a counterweight to U.S. dollar weakness. The VanEck Emerging Markets Fund (VEMAX) and the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC) have demonstrated this dynamic in 2025. For instance, the MSCI Emerging Markets IMI Index returned 1.7% in Q1 2025, outperforming developed markets, while EDC's 3X leverage amplified these gains.

The mechanics are clear: a weaker dollar reduces hedging costs for EM investments, boosts local currency returns, and enhances the competitiveness of EM exports. Brazil's rebound, fueled by fiscal reforms and robust commodity demand, and Asia's 8.7% local currency equity returns exemplify this trend. Investors should consider EDC for aggressive exposure or the iShares MSCI Emerging Markets ETF (EEM) for a more balanced approach.

Commodities: Gold's Dominance and the Role of Diversified ETFs

Gold has been the standout performer in 2025, surging 25.86% year-to-date as the dollar weakened. The WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE) encapsulates the dual appeal of gold and equities, offering a capital-efficient structure that allocates 90% of assets to gold futures and U.S. large-cap equities. This hedge against currency devaluation and inflation has resonated with investors, particularly as central banks added 244 tonnes of gold to reserves in Q1 2025 alone.

However, gold is not the only beneficiary. The Bloomberg Roll Select Commodity Index, which mitigates futures roll costs, returned 6.4% in H1 2025, outperforming the S&P 500. The Invesco DB Commodity Index Tracking Fund (DBC), which tracks 14 major commodities, has gained traction as a diversified play on dollar depreciation. Copper's record highs and energy market volatility further underscore the appeal of broad commodity exposure.

Strategic Allocation: Balancing Risk and Reward

While dollar weakness creates tailwinds, it also amplifies risks. Emerging market ETFs like EDC and EEM are sensitive to geopolitical shifts and trade policy uncertainty, particularly with U.S.-China relations in flux. Similarly, commodities ETFs such as DBC and GDE face volatility from supply shocks (e.g., OPEC+ output decisions) and macroeconomic data.

A prudent strategy involves a mix of leveraged and unleveraged ETFs. For example, pairing EDC with the iShares MSCI EM IMI ESG ETF (ESGEM) can balance growth potential with sustainability criteria. Meanwhile, investors in commodities might allocate to GDE for gold's safe-haven appeal while using DBC for broader diversification.

Conclusion: Positioning for a Weak-Dollar Regime

The 2025 dollar depreciation has redefined the investment landscape, favoring EM and commodity ETFs. High-conviction options like EDC, GDE, and DBC offer compelling entry points for those aligned with this trend. However, success requires vigilance in monitoring trade policy developments, central bank actions, and sector-specific fundamentals. As the dollar's dominance wanes, strategic ETF allocations can transform currency weakness into outsized returns.

For investors seeking to harness this momentum, the key lies in selecting ETFs that align with both macroeconomic narratives and individual risk tolerances. The coming months may yet offer further opportunities as the dollar's structural challenges and global capital reallocation continue to unfold.