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All eyes will be on the end of the key FOMC meeting on Wednesday, with any changes in QE likely to take center stage. The current program calls for $85 billion in Treasury and MBS purchases each month, but analysts are looking for this to get cut in a range of about $5-$20 billion a month.
In fact, according to a recent WSJ poll, close to two-thirds of economists surveyed believe that the taper will begin this week. If this actually happens, it will mark an important point in the QE experiment and it will begin the long process of unwinding the Fed balance sheet at a reasonable clip.
The size of the move, however, could have a huge impact on the markets. Since many—but not a unanimous number—believe that a taper is coming, a ‘no taper this time’ statement from the Fed could definitely move markets.
Meanwhile, a huge degree of tapering could also shock stocks, especially since, according to the WSJ, nearly 40% of surveyed economists believe that the markets haven’t fully priced in a September move (see High Dividend ETFs to Buy Even If the Fed Tapers).
Given this, we could definitely see some movement out of the upcoming Fed decision, so investors should pay close attention to any changes in outlook from the Fed, or an alteration to the tapering program.
These changes could have a drastic impact not only on investor perception, but several key market sectors in particular. We have highlighted four such segments below, any of which could be in for some heavy volume trading when the Fed announcement is inevitably released:
Treasury securities have especially been in focus as of late, thanks to a surging yield for benchmark government debt. Yields on 10-year government bonds have jumped to nearly 3%, nearly doubling since the start of May.
This incredible surge started to take place once investors began to embrace the idea of some Fed tapering. The change in perception made investors reevaluate their stance on treasury bonds, and another shift in outlook could happen after this meeting as well.
While there are a number of Treasury bond ETFs to watch in this space, one that is likely to be a great barometer of mid-term debt is the iShares 7-10 Year Treasury Bond ETF (IEF - ETF report). As you might be able to guess from the name, it focuses on treasury bonds that mature between seven and ten years from now, with a big concentration in debt maturing in 2022 (see all the Government Bond ETFs here).
This fund has struggled as rates have continued to rise over the past three months, as the price for IEF has declined by 5.2%. Meanwhile, in terms of yield, this product pays out 2.5% in 30-Day SEC terms, a decent amount considering the effective duration of 7.6 years.
Gold is a safe haven currency that tends to move inversely of the dollar. So, a strong dollar can push gold lower while a weak greenback can generally make for solid gains in the yellow metal.
A robust tapering policy could suggest a stronger dollar which may have a negative impact on gold. Meanwhile, if the Fed refrains from tapering at this meeting, we could see gold move higher on the news.
Two ways to play gold are with the SPDR Gold Trust (GLD - ETF report) and the iShares Gold Trust (IAU - ETF report). Both are extremely popular, though GLD has more assets and volume while is a cheaper choice (also see Gold Mining ETF Investing Explained).
The two gold ETFs have lost over 20% YTD, including nearly 5% losses in the past three month time frame. Both could rise if tapering doesn’t happen though, while a Zacks ETF Rank of 3 for both suggests that performances might not be that great in the long term, though short term volatility seems likely.
Emerging markets have been among the hardest hit by the surge in Treasury bond yields as of late. Investors have really begun to reevaluate holding on to these risky markets in this type of environment, instead going for safer investments back in the U.S. instead.
This trend has led to double digit losses for many emerging markets, with some—such as in India or Indonesia—entering crash territory. A big taper might push these down further, while a postponement could help to give these markets a shot in the arm.
Two ultra-popular ways to focus on emerging markets are by targeting the duo of the Vanguard FTSE Emerging Markets ETF (VWO - ETF report) and the iShares MSCI Emerging Markets ETF (EEM - ETF report). These two combine to possess nearly $90 billion in assets under management, and see great volume as well (see all the Emerging Market ETFs here).
They both moved higher on news of a less hawkish Fed—thanks to the withdrawal of Summers from the running for chairman—though they have been under pressure lately thanks to sluggish emerging market currencies and deficit worries. However, a weak dollar could help to boost these securities, though with Zacks ETF Ranks of 3 for both, investors should temper their expectations.
With rising rates, investors have already started to see housing lose a little bit of steam. Mortgage activity is down a bit, and it is taking more time to sell houses as well. Plus, with rising rates, many would-be buyers are now priced out of their homes, leaving some on the sidelines.
Given this uncertain trend in the key housing market, any shift in MBS purchases could have a huge impact on housing securities. So look for a shift in policy to create some big moves in this corner of the investing world, especially if anything out of the ordinary is announced.
One way to play this in targeted form is the iShares U.S. Home Construction ETF (ITB - ETF report). This product targets home builders, holding about 33 securities in its basket and focusing on mid caps (read the Comprehensive Guide to Homebuilder ETFs).
The ETF is extremely liquid, trading in volumes of more than 5.6 million shares a day, while assets under management is well over $1.5 billion. ITB has lost about 8% in the past three months, but it currently has a Zacks ETF Rank of 1 (Strong Buy), so it could be poised to rebound in the weeks ahead.
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Author is long VWO.