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Fed Rate Hike Wait May End Today: ETFs To Gain And Lose

After keeping the interest rates at near-zero levels for seven years, the Fed is expected to exit the historic loose monetary policy era at the FOMC meeting to be concluded later today. Per the latest Wall Street Journal poll, about 97% of the economists believe that the Fed will raise rates today while the rest expect the Fed to wait until next year. The probability of a lift-off today is 87% as per private economic forecasters and 83% according to CME Group. Since the Fed has indicated a gradual path for rates hike, the market is speculating at least a quarter percentage point increase in interest rates today. The Fed officials gave strong signals of a December lift-off in recent months. This is especially true, as the U.S. economy has now emerged from the financial crisis and the Great Recession, and is on a firmer footing. With back-to-back months of solid jobs growth, unemployment rate at a seven-year low and moderate inflation, chances of the first rate hike in almost a decade is now looking more real. Additionally, stepped-up economic activities, rising business and consumer confidence, increasing consumer spending, and recovering housing fundamentals will continue to fuel growth in the world’s second largest economy. Further, major headwinds that have plagued the financial market seem to have faded with substantial positive developments in the global economy. In particular, the Chinese economy is showing signs of stabilization while the Japanese and European central banks have ramped up more stimulus measures to revive their economies. Given the improving fundamentals, the historic turn is widely expected, but a collapse in oil prices, which is raising fears of deflation, is weighing heavily on the Fed action. That being said, several ETFs are in focus on the upcoming Fed decision. A few ETFs will be rewarded if the Fed raises rates or signals a hawkish outlook while a few will be severely impacted. Let’s have a look to those: ETFs to Gain SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) A rising interest rate scenario would be highly profitable for the financial sector as a whole. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. In particular, the ultra-popular KRE, having an AUM of $2.7 billion and average daily volume of 4.7 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 93 securities in its basket, the fund is widely spread out across each security with an equal-weight approach of around 1%. The product has a Zacks ETF Rank of 2 or “Buy” rating with a High risk outlook. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long U.S. Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $1.2 billion while it sees an average daily volume of around 2.1 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 3 or “Hold” rating with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The diverging policy in the U.S. and the rest of the world will definitely compel investors to recycle their portfolio into the currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE U.S. Dollar Hedged Index and holds 931 securities in its basket, with none accounting for more than 1.92% share. The product is skewed toward the financial sector with one-fourth of the portfolio while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 24%, closely followed by the United Kingdom (18%), Switzerland (10%) and France (10%). The ETF has an AUM of $13.0 billion and trades in solid volume of more than 4.1 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook. iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) As yield rises, bonds and the related ETFs fall. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays U.S. Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in two-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with an AUM of just $2.6 million. ETFs to Lose SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold will continue to remain under immense pressure as higher interest rates would diminish gold’s attractiveness since the yellow metal does not pay interest like fixed-income assets, and the product tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with an AUM of $21.6 billion and average daily volume of around 6.1 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) Mortgage REITs could be in more trouble if the Fed starts raising rates as short-term rates would rise faster than the long-term rates, thereby leading to a tight spread and lower profits for mREIT companies. REM is the most popular mortgage REIT ETF with an AUM of $819.2 million and average daily volume of less than 1 million shares. The ETF tracks the FTSE NAREIT All Mortgage Capped Index and holds 38 securities in its basket with large allocations to the top two firms – Annaly Capital (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ). These firms collectively make up for 26.4% share while other securities hold no more than 8.5% share. The fund charges investors 48 bps a year in fees and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) The high-yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because the exit from the rock-bottom interest rate policy would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in the high-yield bond space with an AUM of over $14.4 billion and average daily volume of around 9 million shares. It charges 50 bps in fees per year from investors. The fund tracks the iBoxx $ Liquid High Yield Index and holds 1,009 securities in the basket. Effective duration and average maturity came in at 4.340 and 5.44 years, respectively. The ETF has a Zacks ETF Rank of 4 or “Sell” rating with a High risk outlook. iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) The end of a cheap and an abundant dollar era would pull out more capital from the emerging markets, stirring up concern for most nations. Additionally, a prolonged weakness in commodities has been dampening the appeal for these markets. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various securities with none holding more than 3.51% of assets but is tilted toward the financial sector at 27.5%, followed by information technology (21.2%). Among the emerging countries, China takes the top spot at 26.3% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. Original post

Dollar May Hit Parity With Euro: Bet On These ETFs

With the prospect of interest rate hike back on the table, dollar is likely to hit parity with Euro anytime soon. This is especially true as the Fed hinted at a modest December lift-off if the U.S. economy remains on track. The tight monetary policy will reduce the supply of money flowing into the economy, leading to strength in the greenback. As a result, dollar resumed its clear upward journey against the basket of other currencies, rising over 6% in the past one month. And guess what? The latest string of economic data is clearly supporting this view with October payrolls logging the biggest gain this year, unemployment falling to a new seven-year low of 5% and average hourly wages showing the sharpest growth since July 2009. Consumer confidence is also up, with the University of Michigan consumer sentiment index rising to 93.1 in early November from 90 in October, after dropping to 87.2 in September from 91.9 in August. While the manufacturing sector expanded at its slowest pace in more than two years in October on a weak global economy and strong dollar, rise in new orders spread some hopes in the sector. After two straight months of decline, inflation also rose a modest 0.2% last month – an important factor in the Fed rate hike decision. All these suggest that the U.S. economy is showing an impressive rebound after a lazy summer and looks strong enough for a December rate increase. On the other hand, euro has been slumping against the dollar and tumbled 6% in the past one month. The European Central Bank (ECB) has been looking for more stimulus measures as soon as December to spur growth in the economy and fight against deflation. Currently, the ECB is pumping €60 billion ($68 billion) per month into the sagging economy courtesy of its QE program that began in March and will run through September 2016. These diverging policies will continue to drive the U.S. dollar upward, thereby resulting in depreciation of the euro against the greenback. Further, the latest terrorist attack in the capital of France parked geopolitical tensions and raised concerns over the slowly recovering economy, pushing the euro down. Meanwhile, the tragedy has shaken investors’ confidence around the world, encouraging them to take a flight to safety in the U.S. dollar. If the current trend persists, the EUR/USD parity may be seen as euro will continue to fall while dollar will continue to rise. Investors seeking to tap this opportune moment could bet on the following ETFs. PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 13.6% collectively in Japanese yen and 11.9% in British pound. The fund has so far managed an asset base of over $1 billion while sees an average daily volume of around 2.2 million shares. It charges 80 bps in total fees and expenses, and gained 4.9% over the past one month. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) This product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. The fund allocates higher to the Euro at 30.3%, closely followed by Japanese yen (18.5%), Canadian dollars (11.8%) and Mexican peso (10.1%). Other currencies like British pound, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real receive single-digit allocation in the fund’s basket. This ETF has amassed $248.4 million in its asset base and charges 50% in expense ratio. Volume is light as it exchanges nearly 195,000 shares a day on average. The fund added 3.5% over the past four weeks. ProShares Short Euro (NYSEARCA: EUFX ) This fund seeks to deliver the inverse return of the daily performance of euro versus the U.S. dollar. It is often overlooked by investors as it has just $17.9 million in its asset base while volume is light at around 16,000 shares per day. It charges 95 bps in annual fees and added 6.3% over the past month. Original Post

What Lies Ahead For Dollar ETFs?

Although the Fed rate hike hearsay continues to dominate the headlines, investors haven’t really seen this speculation shift to huge gains for the U.S. dollar, at least not in the recent time frame. In fact, the greenback – as represented by the U.S. dollar Index – has lost its value in the last one month and five-day period (as of September 15, 2015). One of the reasons for this unexpected move was an extremely dour trading scene throughout August and the start of September. Maddening economic issues in China – a currency devaluation and a six-and-half-year low manufacturing data for August – took the global market in its grip, and crushed the global equities in the last one month. Yet the U.S. dollar has held firm in 2015 (so far), as many investors remain long-term bulls on the world’s reserve currency due to a recovering American economy. This was truer as the most developed and emerging nations are dragging their feet currently, leaving the U.S. as the lone star. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008. This more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening. Additionally, average hourly wages rose 0.3% sequentially and 2.2% year over year. The average work week also nudged up to 34.6 from 34.5 in the prior and the year-earlier months. All these made September lift-off a heightened possibility that should have bolstered the greenback, but kept it range-bound due to global market rout. Can Greenback Gain Post Fed? Things are at a critical juncture at this moment. Two ETFs offering exposure to U.S. dollar (USD) against a basket of world currencies – PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) – are up 4.1% and 5.8% so far this year (as of September 15, 2015) but retreated about 1.3% and 0.2% in the last one month, respectively. While many may view the recent dip in the greenback as a setback, we believe that this fall led the U.S. dollar and the related ETFs toward the fair valuation. These dollar-related products surged from the latter part of last year due to the diverging monetary policies between the U.S. and other developed and some emerging markets. The U.S. wrapped up its QE measure late last year while Japan boosted its gigantic asset-buying program and the Euro zone initiated a QE launch in early 2015. This policy differential made the U.S. dollar a king among its peer currencies while other developed currencies started to lose out on economic stimuli. As a result, the U.S. dollar index surged over 13% in the last one year (as of September 14, 2015). Thus, a certain pull-back will now help the U.S. dollar to better prepare for a rally if the Fed hikes rates this week). And even if the Fed opts for a December lift-off or sometime in early 2016, the U.S. dollar should prevail in the coming days as inflows of ultra-cheap money in Europe, Japan and some emerging economies will continue to weaken their respective currencies against the greenback, which is still stronger. Which ETF is a Better Bet? Given this, investors could definitely play the U.S. dollar by considering either UUP or USDU. UUP looks to track the U.S. dollar against a basket of six world currencies – the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.10%), Swedish krona (4.20%) and Swiss franc (3.60%). USDU tracks the U.S. dollar against a basket of 10 developed and emerging market currencies. It allocates higher to the Euro zone currency at 32.5%, closely followed by Japanese yen (19.25%) and Canadian dollar (11.21%). Other currencies like Mexican peso, British pound, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real receive single-digit allocation each in the fund’s basket. Since, UUP is mostly exposed to the developed economies’ currencies; things are less likely to improve post Fed tightening. On the other hand, USDU gives exposure to a broader basket consisting developed and emerging currencies. Notably, most of the emerging market currencies are tumbling presently and are expected to fall out of favor post-Fed tightening. This should give USDU a scope for outperformance over UUP. Bottom Line Having said this, we would like to note that any resumption in the greenback rally should not be as great as it was late last year. This is because the market has mostly priced in the favorable outcome of the impending Fed lift-off and protracted easing in other developed nations like the Euro zone and Japan and their effects on the exchange rate. Original Post