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Emergency Fed Cut Less Effective: ETFs That Should Survive
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Investor expectations were met by the Fed weeks ahead of its scheduled meeting on Mar 17-18. The U.S. central bank cut the target range for its federal funds rate by 50 bps to 1-1.25% during an emergency move on Mar 3, addressing the possible economic fallout owing to the coronavirus outbreak. It is the first emergency rate cut since the 2008 financial crisis though a cut of 50 bps or 75 bps in the March meeting has already been priced in.
Fed Chair Jerome Powell reaffirmed his view that the U.S. economy remains strong but noted that the spread of the virus had caused significant changes in the U.S. central bank’s outlook for growth. Several other central banks like Japan may pursue policy easing as well. Australia has already cut rates. Hong Kong too slashed rates. The People's Bank of China (PBOC) has also told banks to “help firms struggling with repayments by extending loans and not penalizing them if they are late with payments.”
However, such “coordinated policy response by central banks” failed to stem the market rout as the S&P 500, the Dow Jones and the Nasdaq lost about 2.8%, 2.9% and 3.0% on Mar 3. Among all sectors, technology, financials, communication services and energy lost the most.
Let’s analyze why this happened despite the Fed rate cut.
Has a Huge 50-Bp Emergency Rate Cut Spooked Investors?
The Fed’s on-the-spot rate cut did not go down well with investors. A 50-bp cut (the Fed’s usual move is to cut or hike by 25 bps) before the scheduled meeting probably highlights the severity of the spread of the virus. “Instead of soothing the market, it’s reignited investors’ worst fears,” Michael Arone, chief investment strategist for State Street Global Advisors, as quoted on MarketWatch.
Like many analysts, we believe the likelihood of the current global economic slowdown is caused by a “supply shock” — the absence of goods and services amid virus-led decline in productivity, city lockdowns, factory shutdowns and restrictions on travel. Policy easing is less likely to help such issues as government and central bank measures are normally meant to boost demand. Plus, the latest rate cut was largely priced in Monday’s market rally (read: Low Volatility & Quality ETFs Stay Strong Amid Market Rally).
However, though policy easing cannot fix supply disruptions totally, Fed chair Powell believes that rate cut will help support “overall economic activity.”
Against this backdrop, we highlight a few ETFs that could remain steady amid a volatile market.
Amid the ongoing volatile times, investors are rushing to safe assets like U.S. treasuries, bringing down the benchmark U.S. treasury bond yield to as low as 1.02% on Mar 3. Bond investing is in a sweet spot now.
Investors should note that supply shocks reduce output and increase inflation. This is truer given the latest monetary policy easing by the Federal Reserve, which should boost demand. TIPS offers robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world (read: TIPS ETFs Likely to Benefit From Fed Meeting).
The fund SPIP has average maturity of 8.96 years and adjusted duration of 8.48 years. The 42-security fund charges 42 bps in fees. SPIP added 1.2% on Mar 3.
Gold is gaining currently on the safe-haven status. Gold prices are now at a seven-year high level. Bullion ETF GLD has added 3.2% on Mar 3 and was up 5.1% in the past month. Apart from coronavirus, easing central bank polices and rising expected volatility for 2020 U.S. presidential election have been aiding gold prices (read: Gold to Hit $2000 Soon? ETFs to Bet On).
The Real Estate Select Sector SPDR Fund (XLRE - Free Report)
No wonder, such record-low yields brightened the appeal for rate-sensitive sectors like real estate. In any case, the sector is better-positioned in the backdrop of a steadily growing U.S. economy. The fund yields a solid 3.06%. It was off 0.08% on Mar 3 (read: A Look Back At S&P 500 Sector ETFs in 2019).
It is yet another non-cyclical sector that is poised to remain well-placed amid volatile markets. The fund XLP, which yields 2.65% annually, retreated about 1.4% on Mar 3 (read: "At Least 3 Rate Cuts" by December? Sector ETFs to Play).
Biotech stocks are appealing bets as many firms are engaged in developing the vaccine for the virus. Central bank easing should put this high-growth high-beta sector ETF in a sweet spot. GNOM lost only 1.4% on Mar 3, lesser than the key U.S. equity gauges and the biggest biotech ETF iShares Nasdaq Biotechnology ETF (IBB - Free Report) (down 2.7%) (read: Wanna Be a Value Investor? Follow Buffett & Play 2 ETF Areas).
Internet stocks and ETFs should be better protected than the broader sector as it has less to do with human contact. The coronavirus scare probably should favor the online retailing industry as any kind of lockdown and self-imposed quarantine should boost demand for online shopping and other kinds of internet activities. Chinese online retailer JD.com reported a 215% year-over-year growth in its online grocery sales during a 10-day period between late January and early February. IBUY lost about 2% on Mar 3, lesser than the broader consumer discretionary fund XLK (down 2.4%) (read: Wall Street in Correction: 4 Sector ETFs Unscathed in February).
The virus scare has stressed on the importance of fintech technology as people are likely to prefer online transactions now. The fund FINX invests in companies on the leading edge of the emerging financial technology sector. These companies are poised to transform industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions. The fund shed just 1.7% on Mar 3 against the 3.8% slump noticed in the broader tech fund (XLK - Free Report) .
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Emergency Fed Cut Less Effective: ETFs That Should Survive
Investor expectations were met by the Fed weeks ahead of its scheduled meeting on Mar 17-18. The U.S. central bank cut the target range for its federal funds rate by 50 bps to 1-1.25% during an emergency move on Mar 3, addressing the possible economic fallout owing to the coronavirus outbreak. It is the first emergency rate cut since the 2008 financial crisis though a cut of 50 bps or 75 bps in the March meeting has already been priced in.
Fed Chair Jerome Powell reaffirmed his view that the U.S. economy remains strong but noted that the spread of the virus had caused significant changes in the U.S. central bank’s outlook for growth. Several other central banks like Japan may pursue policy easing as well. Australia has already cut rates. Hong Kong too slashed rates. The People's Bank of China (PBOC) has also told banks to “help firms struggling with repayments by extending loans and not penalizing them if they are late with payments.”
However, such “coordinated policy response by central banks” failed to stem the market rout as the S&P 500, the Dow Jones and the Nasdaq lost about 2.8%, 2.9% and 3.0% on Mar 3. Among all sectors, technology, financials, communication services and energy lost the most.
Let’s analyze why this happened despite the Fed rate cut.
Has a Huge 50-Bp Emergency Rate Cut Spooked Investors?
The Fed’s on-the-spot rate cut did not go down well with investors. A 50-bp cut (the Fed’s usual move is to cut or hike by 25 bps) before the scheduled meeting probably highlights the severity of the spread of the virus. “Instead of soothing the market, it’s reignited investors’ worst fears,” Michael Arone, chief investment strategist for State Street Global Advisors, as quoted on MarketWatch.
Source: CNBC
Like many analysts, we believe the likelihood of the current global economic slowdown is caused by a “supply shock” — the absence of goods and services amid virus-led decline in productivity, city lockdowns, factory shutdowns and restrictions on travel. Policy easing is less likely to help such issues as government and central bank measures are normally meant to boost demand. Plus, the latest rate cut was largely priced in Monday’s market rally (read: Low Volatility & Quality ETFs Stay Strong Amid Market Rally).
However, though policy easing cannot fix supply disruptions totally, Fed chair Powell believes that rate cut will help support “overall economic activity.”
Against this backdrop, we highlight a few ETFs that could remain steady amid a volatile market.
SPDR Portfolio TIPS ETF (SPIP - Free Report)
Amid the ongoing volatile times, investors are rushing to safe assets like U.S. treasuries, bringing down the benchmark U.S. treasury bond yield to as low as 1.02% on Mar 3. Bond investing is in a sweet spot now.
Investors should note that supply shocks reduce output and increase inflation. This is truer given the latest monetary policy easing by the Federal Reserve, which should boost demand. TIPS offers robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world (read: TIPS ETFs Likely to Benefit From Fed Meeting).
The fund SPIP has average maturity of 8.96 years and adjusted duration of 8.48 years. The 42-security fund charges 42 bps in fees. SPIP added 1.2% on Mar 3.
SPDR Gold Shares (GLD - Free Report)
Gold is gaining currently on the safe-haven status. Gold prices are now at a seven-year high level. Bullion ETF GLD has added 3.2% on Mar 3 and was up 5.1% in the past month. Apart from coronavirus, easing central bank polices and rising expected volatility for 2020 U.S. presidential election have been aiding gold prices (read: Gold to Hit $2000 Soon? ETFs to Bet On).
The Real Estate Select Sector SPDR Fund (XLRE - Free Report)
No wonder, such record-low yields brightened the appeal for rate-sensitive sectors like real estate. In any case, the sector is better-positioned in the backdrop of a steadily growing U.S. economy. The fund yields a solid 3.06%. It was off 0.08% on Mar 3 (read: A Look Back At S&P 500 Sector ETFs in 2019).
Consumer Staples Select Sector SPDR ETF (XLP - Free Report)
It is yet another non-cyclical sector that is poised to remain well-placed amid volatile markets. The fund XLP, which yields 2.65% annually, retreated about 1.4% on Mar 3 (read: "At Least 3 Rate Cuts" by December? Sector ETFs to Play).
Global X Genomics & Biotechnology ETF (GNOM)
Biotech stocks are appealing bets as many firms are engaged in developing the vaccine for the virus. Central bank easing should put this high-growth high-beta sector ETF in a sweet spot. GNOM lost only 1.4% on Mar 3, lesser than the key U.S. equity gauges and the biggest biotech ETF iShares Nasdaq Biotechnology ETF (IBB - Free Report) (down 2.7%) (read: Wanna Be a Value Investor? Follow Buffett & Play 2 ETF Areas).
Amplify Online Retail ETF (IBUY - Free Report)
Internet stocks and ETFs should be better protected than the broader sector as it has less to do with human contact. The coronavirus scare probably should favor the online retailing industry as any kind of lockdown and self-imposed quarantine should boost demand for online shopping and other kinds of internet activities. Chinese online retailer JD.com reported a 215% year-over-year growth in its online grocery sales during a 10-day period between late January and early February. IBUY lost about 2% on Mar 3, lesser than the broader consumer discretionary fund XLK (down 2.4%) (read: Wall Street in Correction: 4 Sector ETFs Unscathed in February).
Global X FinTech ETF (FINX - Free Report)
The virus scare has stressed on the importance of fintech technology as people are likely to prefer online transactions now. The fund FINX invests in companies on the leading edge of the emerging financial technology sector. These companies are poised to transform industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions. The fund shed just 1.7% on Mar 3 against the 3.8% slump noticed in the broader tech fund (XLK - Free Report) .
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>