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ETF News And Commentary

June was a busy month not only on the economic front but on political issues as well. Significant domestic and international developments had an impact on the ETF world last month drawing a lot of attention to the space. Some of the major events that cast its impact on ETFs are discussed below.  

Energy Space Fired by Iraq Turmoil

The top story in June was the Iraqi insurgency wherein the Sunni Islamist militants escalated violence and solidified their grip on northern Iraq. The militants, led by the Islamic State of Iraq and the Levant, captured three major northern Iraqi cities – Mosul - the country's second-largest city, Tikrit, and Baiji - Iraq's biggest oil refinery. The rebels could even try to seize the capital city of Baghdad in the south (read: 3 Energy ETFs to Watch on Iraq Turmoil).

If the violence escalates further, it could lead to global disruption in oil supply. This is especially true as Iraq is the second-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC) group after Saudi Arabia and has the world's fifth-largest proven oil reserves. As per the International Energy Agency (IEA), more than 60% of the global output is expected to come from Iraq until 2019.

This threat led to a spike in oil prices and resultantly in many energy ETFs. The price of crude oil hit a nine-month high of $115 following the violence. Brent crude price jumped to a 10-month high exceeding $114 per barrel while West Texas Intermediate crude oil climbed to a 9-month high of over $107 per barrel (read: Uprising in Iraq Puts These Oil ETFs in Focus).

Coming to the ETF world, futures based products like United States Brent Oil Fund ((BNO - ETF report)),
United States Oil Fund ((USO - ETF report)), PowerShares DB Oil Fund (DBO) and iPath S&P GSCI Crude Oil Index ETN (OIL) rose nearly 4% last month. Equity based ETFs like Market Vectors Oil Services ETF (OIH), iShares U.S. Oil Equipment & Services ETF (IEZ) and SPDR S&P Oil & Gas Exploration & Production ETF ((XOP - ETF report)) gained about 8%. These products however have a Zacks ETF Rank of 4 or ‘Sell’ rating.

Interest Rates Cut in Europe

Early last month, the European Central Bank (ECB) took a bold move by sending one of the key interest rates to negative territory for the first time in the history of the Euro zone. The aim is to get Europe out of the woods yet again and prevent deflation (read: Negative Interest Rates Put These European ETFs in Focus).

The ECB cut its benchmark rate to 0.15% from 0.25%, while the deposit rate was slashed from zero percent to a negative 0.1%. The central bank also introduced a package of liquidity measures. The move by the ECB sent the European stocks and related ETFs higher. The Stoxx Europe 600 Index climbed to an almost six-year high on the day monetary easing measures were announced.

While European ETFs have performed remarkably on the news, sluggish data out of the Euro zone have weighed on the performance of these ETFs lately. FTSE Europe ETF ((VGK - ETF report)) and SPDR EURO STOXX 50 ETF ((FEZ - ETF report)) dipped 0.1% over the one-month period while iShares MSCI EMU Index Fund (EZU) lost 2.6% (read: 3 Worst Performing European ETFs of Last Week).

However, these products currently have a  Zacks ETF Rank of 2 or ’Buy’ rating, suggesting that these will continue to outperform in the coming months.

U.S. Equity at Record High

The U.S. stocks not only reached record highs last month but are also showing no signs of stalling. It appears that the sharp 2.9% decline in the first quarter – the most since the last recession ended – had practically no impact on the equity markets. In fact, the S&P 500 completed the longest stretch of quarterly gains in 16 years at the end of June while the Nasdaq recorded its longest streak of quarterly gains in 14 years.

The incredible performance was credited to rising merger & acquisition activities, a strengthening job market, surging auto sales and growing consumer confidence. Further, the stumbling housing growth has turned around thanks to a pick-up in business activity and consumption.

Moreover, the Fed continued to scale back its monetary stimulus albeit keeping the interest rates low as promised. This can only indicate that the economy is improving substantially after the slowdown in a frigid first quarter (read: US Economy Warms Up After Frigid Winter: 3 ETFs to Watch).

The broad U.S. equity ETFs providing exposure to a variety of sectors and securities have likewise seen solid trading last month, reaching all-time highs. The SPDR S&P 500 ((SPY - ETF report)) hit a record high of $196.60 on June 19, having gained 2.5% while PowerShares QQQ ((QQQ - ETF report)) rose over 3% in June to touch a new high of $94.14 on the last trading day. While the former has a Zacks ETF Rank of 2 the latter retains a Zacks Rank of 3 or ‘Hold’ rating.

Bottom Line

Investors should closely watch the developments taking place in these spaces as we head into the next month. Energy ETFs are likely to continue its bullish trend, especially if tensions in Iraq continue to mount. Europe and U.S. stocks will also see strong trading thanks to improving global conditions and supportive monetary policies.  

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