The summer of 2011 is shaping up a lot like that of 2010. Yet again, fears in the eurozone have sparked massive sell-offs in global equities, as more countries become at risk of defaulting this year. Worries over the U.S. economy are also a major factor in the market slump, as many analysts have slashed the U.S. growth outlook for the year. President Obama even weighed in on the situation, stating that our economy will rebound once the housing market finds its footing, a scenario that he feels will not play out for about a year. When markets endured a similar period last year, the Fed rode in to the rescue and announced a $600 billion QE2 program, sending markets surging.
Now, investors are looking for Fed Chair Ben Bernanke and his team to pull us out yet again, as Bernanke is set to speak from Jackson Hole, Wyoming on Friday. While this speech is usually low key, many are looking for some sort of major announcement, as markets have been anything but stable in the past few weeks. In fact, many feel that markets opened up on a high note this week because investors are already assuming some sort of asset purchasing program will be detailed later in the week, and with good reason. The S&P 500 “is actually about 4% lower than when the second round of easing officially began” writes CNBC. With losses quickly piling up, many analysts feel that a QE3 is on the way, and that it will put markets back on track.
Still, others feel that there will be no such announcement for a number of reasons. Many feel that the last two QE programs simply delayed the inevitable, and with the Fed announcing to hold rates for nearly two years, printing hundreds of billions may have an adverse impact on inflation rates. Some analysts say that even if a QE3 is outlined, it will be too little too late as the U.S. seems to have a number of economic indicators weighing against the nation, possibly pointing to a return to a recession.
Despite what side you fall on, there is no question that Friday will be a high volatility trading day. “‘The big thing is if he does announce it we’re going to have a thousand-point rally. We’ll be making new highs before you can blink. I am hedged right now, but you’ve got to have your finger on the button,’” said Keith Springer, president of Springer Financial Advisory, showing signs of optimism but an understanding that news of no QE could slaughter markets. If that wasn’t enough for investors to close out the week, the U.S. GDP report will also be released, suggesting that it will be an important day for markets no matter what happens with the chairman’s speech.
Below, we outline five ETFs to watch ahead of this important meeting in Jackson Hole as well as the results for our GDP figure in the most recent quarter:
SPDR Gold Trust (NYSEARCA:GLD)
GLD offers physical exposure to gold bullion, and is one of the most popular securities in the world. With nearly $77.5 billion in assets and an average daily volume topping 19 million, this ETF has actually surpassed the size of SPY (at least for the time being). It is no secret that gold has been surging this year, prompting a healthy 28% return in 2011 for GLD. But the precious metal has been doing exceptionally well with all of the volatility the past few weeks have seen, as investors are piling into this fund as a safe haven from wildly unpredictable equities.
If Bernanke does announce a QE3, look for equities to post an outstanding couple of days while GLD possibly falters, likely shrinking it back below SPY. But if there is no asset-purchasing on the way, equities will likely tank while GLD could gain. Also consider that even if QE3 is announced, a lower than expected GDP could offset Bernanke’s speech and send GLD higher, and vice versa. With that being said, GLD could rise even if the announcement for more easing does take place. Many traders will likely see the move for QE3 as highly inflationary and could spark more inflows into gold assets, however, only time will tell how the precious metal market reacts to a move.
S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX)
This fund tracks short-term VIX futures popularly referred to as the "fear index." VXX is one of the most popular trading tools available, changing hands an average of 63 million times daily in the trailing month. It is not uncommon to see the fund jump anywhere from 5%-10% in a given session, prompting most traders to measure their holding time in this product in minutes and hours rather than days or weeks. But with the last few weeks posting some horrendous sessions, VXX has actually gained over 100% in the most recent four week period, quite the feat for a fund that deals with steep contango issues.
As the fear indicator, VXX has been active all week, as investors make a bet on Bernanke’s future plans. The announcement of a QE3 could send this fund down double digits on the day, but a lack of direction from Bernanke could do just the opposite, making this a risky, but potentially very rewarding position to close the week.
Barclays TIPS Bond Fund (NYSEARCA:TIP)
This ETF is tracks an index that includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. The fund features great liquidity for a bond product, and has gained around 8% in 2011. An asset-repurchase program could spark fears on inflation, as rates are currently frozen, which may cause investors to seek out TIPS as a means for battling rising prices. But if there is no announcement of any future plans, TIP still has the possibility of gaining, as equities will likely fall, sending investors into bonds and other, safer, investments.
DB USD Index Bullish (NYSEARCA:UUP)
This fund tracks long USDX futures contracts, granting exposure to the greenback. The dollar has had some problems in the last few years as it has exhibited weakness during our economic woes. What used to be the safe haven currency is now more of a speculative play, as investors have grown wary of the dollar, and sought better performing currencies like the Swiss franc instead. UUP has lost around 7% on the year as our currency has struggled to find its footing in this unstable economy.
An announcement of more QE will likely bring UUP down, as the dollar will be diluted by whatever amount the Fed decides to print. But a lack of action from the Fed could lead to gains in UUP, as investors will more than likely abandon equity for safer grounds, which may include this ETF.
25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEARCA:ZROZ)
With all of the drama surrounding the current U.S. debt situation, bond ETFs have been in focus as investors decide if they are better served in domestic debts or moving assets elsewhere. This ETF only tracks debts that have a maturity of 25 years or more, meaning that this product will be very sensitive to market blips and more so than other, shorter-term debt. ZROZ may throw off some investors with its zero-coupon structure, but its returns of 28.6% in 2011 will certainly catch anyone’s eye, as this fund is one of the top performers in our Government Bonds ETFdb Category.
This long-term debt product will likely see a boost from asset-repurchases, as the Fed could shift into longer-term debt in order to bring down that section of the curve. As a result, another QE program could send ZROZ soaring on the day and for the near-term future as well, especially if 30-year bonds are singled out. On the other hand, a lack of QE has the potential to go either way for this ETF. It could be that investors will flee equities for long-term debts to avoid the inevitable rough times ahead, boosting ZROZ. Still, the fund could be hit hard due to its high levels of sensitivity, curtailing its massive YTD gains.
Disclosure: No positions at time of writing.
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