The last FOMC meeting has added to the speculation that another round of quantitative easing is coming from the Federal Reserve. After keeping interest rates steady, as everyone expected, the statement alluded to the possibility of QE3 by saying they will:
... provide additional accommodation as needed to promote a stronger economic recovery…
Add that to the most recent fodder from central bankers in reference to QE3, and the odds have continued to increase.
With the S&P 500 hitting a fresh four-year high last week, there are a large number of experts that believe the market has already priced in more easing from the Fed. This may be partly true, however, the actual announcement and the high likelihood that the ECB will join the party next week could boost stocks to new highs and send the short sellers scrambling.
To be prepared for this possibility, I have put together four ETFs that should benefit from QE3.
If Bernanke drops the hammer down and QE3 is announced, it will lead to money flowing into the risk-on assets such as equities. So why not look to the high volatility stocks as an investment option? The PowerShares S&P 500 High Beta ETF (SPHB) is composed of the 100 highest beta stocks in the S&P 500 and is heavily invested in the "riskier" sectors, such as financials, energy and IT. The expense ratio is 0.25%, and it yields 1.2%. In 2012, the ETF is up 7%, lagging the S&P 500.
Gold and Greenback
Gold has already begun to move higher as investors are anticipating a move by the Fed. The SPDR Gold ETF (GLD) closed at a new four-month high recently and broke out of a narrow trading range, triggering a Buy signal on the chart. It now appears GLD could move another 10% or more as long as it can hold above the $157 area. Gold is a beneficiary of easing because it will move inverse to the price of the U.S. Dollar. More quantitative easing will weigh on the greenback, because it adds liquidity to the market and lowers the value of the currency.
To play a fall in the greenback the option is the PowerShares DB U.S. Dollar Bearish ETF (UDN). The ETF moves in the inverse of the U.S. Dollar Index, which is the value of the greenback versus a basket of foreign currencies. Year-to-date the ETF is down 0.7%, greatly lagging the overall market.
Junk is Good
The goal of the Fed is to keep interest rates down through another round of easing, resulting in low yields from most bonds. Corporate bonds rated below investment grade, or junk, have the ability to offer yields well above treasuries as well as the opportunity to move with a higher equity market. The SPDR Barclays High Yield Bond ETF (JNK) has over 200 individual corporate bonds in the portfolio and currently pays a monthly distribution that equals a 7.1% annual yield. In 2012 the ETF is up 4%, not considering the monthly dividends.
What Can Go Wrong
Two things could occur that make the above-mentioned ETFs underperformers. One is that QE3 never arrives and the markets languish without the help of the Fed. The other scenario would be an announcement of QE3 and the market sells off on the news. This would a "buy the rumor, sell the news" situation and could hurt some or all of the ETFs above.