This Week's ETFs to Watch: UUP, FXY, DXJ, EPI

A rough week for stocks has come and gone with all three major U.S. indexes settling lower. The S&P 500 shed nearly 1.2 percent as traders fretted over global central bank policy, namely the 800-pound gorillas in the room, those being the Bank of Japan and the Federal Reserve.

Speaking of the Fed, that is the entity that will dominate this week's action as Ben Bernanke and friends kick off a two-day meeting on Tuesday. Financial markets have already begun pricing in possible tapering of the Fed's $85 billion-per-month bond-buying activities, but it should be remembered the Fed has made no official announcements to that effect.

Additionally, it is good economic news that will give the Fed room to wind down its easing efforts and, at least in theory, solid data points should boost riskier assets such as stocks and ETFs. Let's see how that plays out this week with the following ETFs.

PowerShares DB US Dollar Index Bullish (UUP)
There is $4.3 billion invested in various currency ETFs and ETNs, a small number relative to other asset classes available in ETF Land, and one that has the potential to get smaller, not bigger, in the near-term. Investors that opt to use ETFs for currency exposure not only must contend with what BoJ and the Fed can do to roil global markets on a moment's notice, but another vexing scenario as well.

That being technical weakness in the U.S. Dollar Index, which UUP serves as a proxy for, combined with weakness in emerging markets currencies. When it comes to currency ETFs, the unfortunate reality is that in the days ahead, the seeking shelter play might just be the CurrencyShares Japanese Yen Trust (FXY). If that prediction proves accurate, UUP and ETFs with exposure to high-beta currencies will be vulnerable.

WisdomTree Japan Hedged Equity Fund (DXJ)
It is becoming progressively harder, thanks to BoJ, to construct these lists without at least one Japan ETF. DXJ's chart over the past three or four weeks is by no means attractive, but opportunities remain with this fund and some of its rivals.

The issue is can investors readjust expectations regarding the effectiveness of BoJ and Abenomics. Everything looked great from mid-November, when it became obvious that then candidate Shinzo Abe was a strong contender for Japan's premiership, through the first half of a May.

However, when markets got ahead of themselves, investors seemed to quickly forget that Japan's debt, demographic and deflation problems will require long-term fixes. None of these ills can be cured in six months time. If the market speaks to the point that Abenomics is still winning, DXJ is a buy.

WisdomTree India Earnings ETF (EPI)
Nearly everyone in the U.S. will be focusing on the Fed this week, but do not forget that when you wake up Monday morning, the Reserve Bank of India will have made a monetary policy decision. Forgive the youthful verbiage, but the RBI meeting is kind of a big deal because it comes at a time when Indian inflation is cooling, but also just days after the rupee hit a record low against the U.S. dollar.

RBI pared rates to 7.25 percent following reductions at its past three meetings and while that has yet to prop up EPI and its brethren, data suggest foreign investors are gobbling up Indian stocks. Perhaps it is just a coincidence and market factors at these times should be remembered, but in three of the past four year, EPI has made impressive June through late August/early September gains.

BY Todd Shriber, ETF Professor