First of all, the Fed appeared pleased with the pickup in the U.S. economic growth in the second quarter of 2015, but not overenthusiastic. The Fed sees the current momentum as ‘moderate’. Job growth numbers and an uptick in housing data were reasonably satisfactory but sluggish business fixed investment and net exports were the causes of concerns for the Fed (read: Is it the Right Time for Homebuilder ETFs?).
Inflation is still short of the Fed’s longer-term target due to the free fall in energy prices last year and declining prices of non-energy related imports, per the Fed minute. The Fed expects the price index to remain under pressure in the near term though it will perk up in the medium term.
The Fed made it clear that it is well on its way to tighten the policy sometime this year, but to reciprocate to this lukewarm economic recovery, it indicated a slower pace of rate hike when the step is actually taken. Added to this, the Fed slashed its projection for the benchmark interest rate for 2016 and 2017, though the guidance for the ongoing year was kept unchanged.
The median estimate for 2016 was cut to 1.625% from 1.875% guided in March and for 2017 it was reduced to 2.875% from 3.125% projected in March. If this was not enough, the Fed lowered the expectation for real GDP for 2015 to 1.8─2.0% from 2.3─2.7% guided in March.
Market Impact
The reductions combined prompted some big moves in various markets and asset classes as traders started to adjust their positions according to the Fed’s actions. The U.S. dollar was among the big movers as it slipped to a three-week low following the cut in longer-term U.S. interest rates forecast, per Bloomberg.
Yield on the benchmark 10-Year U.S. Treasury note remained 2.32% for the last two days (ended June 17, 2015) mostly due to ‘Grexit’ worries which suddenly bolstered the appeal for the safe haven assets despite rate hike concerns in the U.S. In the fixed income market, short-term bonds were among the gainers.
Below we discuss a few ETFs which were among the biggest movers after the Fed minutes and could remain in focus as there appears no maddening rush to normalize interest rates.
Dollar – The Loser
PowerShares DB US Dollar Bullish Fund (UUP)
This fund is the prime beneficiary of the rising dollar as it offers exposure against a basket of world currencies. These include the 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 in U.S. Treasury securities. Needless to say, the fund underperforms in a falling dollar scenario.
In terms of holdings, UUP allocates nearly 58% in euro while 25% together in Japanese yen and British pound. The fund has managed an asset base of $1.42 billion so far while sees an average daily volume of 3 million shares. It charges 75 bps in total fees and expenses. Due to intense selling pressure, this dollar ETF was down about 0.9% at the close of trading on June 17, 2015 and lost over 1% after hours (read: Can U.S. Dollar ETFs Continue to Surge in 2015?).
The Gainers
Gold Mining – Market Vectors Gold Miners ETF (GDX)
As soon as the greenback dips, commodity prices rise. Gold, one of the key precious metals, has emerged from the slump. SPDR Gold Shares (GLD) tracking the gold bullion added about 0.5% (as of June 17, 2015) while the largest big-cap gold mining ETF GDX added about 2.9% on the same day. The latter saw more gains as it often trades as a leveraged play on gold.
However, investors should note that the gains were short-lived as both ETFs were down after hours. GDX fell 0.4% while GLD lost 0.1% after the market closed. GDX is one of the popular gold mining ETFs in the market today with assets of $6.04 billion and a trading volume of roughly 35 million shares a day. The fund charges an expense ratio of 53 basis points a year. GDX is heavy on Canada with more than 50% focus (read: Inside the New Sprott Zacks Gold Mining ETF).
Short-term Treasury ─ iShares 1-3 Year Treasury Bond ETF (SHY)
The reduction in rate projections and a somewhat soft tone of the Fed regarding rate hike made short-term treasury ETFs a winner. This fund tracks the Barclays U.S. 1-3 Year Treasury Bond Index and holds 98 securities in its basket. The fund has an average maturity of 1.84 years and effective duration of 1.82 years.
SHY is the most popular and most liquid ETF in the short-term bond space with AUM of $8.74 billion and average daily volume of more than 1.4 million shares. Expense ratio came in at 0.44% and its yield stands at 0.44%. The fund was up 0.02% (read: 3 Bond ETFs to Consider in a Market Slump).
Emerging Market Dividend – ALPS Emerging Sector Dividend Dogs ETF (EDOG)
An indication of a sluggish trail of rate hike made emerging markets ETFs strong performers while the dovish policy (presumably) brightened the dividend investing theme. This fund applies the ‘Dogs of the Dow Theory’ on a sector-by-sector basis. It reflects the performance of the emerging market equities with above-average dividend yields.
The fund gives investors roughly equal exposure to all the sectors. This approach results in a portfolio of about 50 stocks with each security accounting for less than 2.79% of total assets. EDOG has accumulated $12 million in AUM. It charges 60 bps in annual fees and has an annual dividend yield of 3.79%. The fund was up 1.17% on June 17, 2015.
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PWRSH-DB US$ BU (UUP): ETF Research Reports
MKT VEC-GOLD MI (GDX): ETF Research Reports
ISHARS-1-3YTB (SHY): ETF Research Reports
ALPS-EM S DV DG (EDOG): ETF Research Reports
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