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Fed Tapers Bond Purchases: 3 ETFs in Focus on the News

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After months of speculation, the Federal Reserve has finally begun to taper its QE bond buying program. In the latest FOMC meeting, Ben Bernanke and company highlighted the slowly improving economy, and the lowered unemployment levels, as chief reasons for their decision to begin the bond taper.

On a monthly basis, the Fed will now buy $75 billion in monthly assets, down from the current rate of $85 billion a month. The $10 billion reduction will come equally out of MBS purchases and longer-term Treasury bonds, putting MBS purchases at $35 billion a month, and Treasury bonds at $40 billion (see Long Term Treasury Bond ETF Investing 101).

Bernanke also reiterated that the scaling back of asset purchases wasn’t on a preset course, and that future decisions on asset purchases would be made based on coming data releases. Furthermore, the Committee reaffirmed its view that a ‘highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

In other words, low rates seem here to stay for a while, even if the Fed tapers all of the QE bond purchases in 2014.

Market Impact

Initially, stocks plummeted on the news, though key benchmarks quickly recovered, and were trading modestly in the green after a few minutes. Commodities also saw a bit of strength on the day—gold and oil were both up about 0.5%-- while the Ten Year bond saw its rates rise to 2.90%, though they hit as high as 2.93% at one point in the session.

Meanwhile, in the ETF world, several funds stole the show and saw huge moves following the tapering  announcement. Below, we profile three such types of funds which really experienced big moves on the day, and could be impacted if there are more QE-related releases in future meetings:

Homebuilder ETFs

Thanks to such a small move higher in the government bond market and hopes that the Fed will keep benchmark rates low for quite some time, homebuilder ETFs were among the biggest winners on the day. In particular, the SPDR S&P Homebuilders ETF (XHB - Free Report) and the iShares US Home Construction ETF (ITB - Free Report) were in focus (also read Taper Concerns Put Focus on Homebuilder ETFs).

Both funds were well in the green, and added far more than the overall market. XHB was up almost 2.8% on the news, while ITB added over 3.6%. Arguably, ITB was up more than XHB because it focuses more on the builders as opposed to the broad industry like XHB—which includes holdings in home furnishing companies—but both were clearly beneficiaries from the low rate outlook.

Gold Mining ETFs

Hopes for an extension of easy money policies—even if the taper continues at a solid pace—were very helpful to the beaten-down precious metal market. While ETFs like (GLD - Free Report) were up about half a percent on elevated volume, the gold mining space, which generally trades as a leveraged play on gold, was the real winner (also see High Dividend ETFs to Buy Even If the Fed Tapers).

In this market, the Market Vectors Gold Mining ETF (GDX - Free Report) jumped by 1.4%, while the Market Vectors Junior Gold Miners ETF (GDXJ) soared more than 2.8% on the news. So, assuming easy money policies stay and a slow tapering process is the path ahead, gold miners may be able to bounce off of their previous lows.

Volatility ETFs

Easily one of the biggest losers in the ETF world was in the volatility space. With the taper finally starting, one of the major uncertainties hanging over the market was eliminated, causing investors to sell off the ‘fear index’.

In particular, the iPath S&P 500 VIX Short Term Futures ETN (VXX - Free Report) was a huge loser, sliding by more than 5.5% on the session. This move came on elevated volume too, as more than 27 million shares had moved hands by 2:45 eastern time, well above the 17 million usually daily average (see Why I Hate Volatility ETFs (And Why You Should Too)).

Bottom Line

With one area of concern finally in the books, many investors bought stocks thanks to the solid growth outlook for 2014, and the improving economic fundamentals. And with rates expected to stay low for quite some time even if the taper is completed next year, several key segments are looking relatively strong even if rates edge up a little bit.

However, since the pace of Fed tapering isn’t on a preset course, it will be important to monitor future meetings and to see what the FOMC does next. Any deviation from the new taper path, or commentary about future rate increases, could definitely impact any of the above ETFs.

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