The latest Fed meeting was presumably the most anticipated one in quite some time, as investors increasingly wagered on a June timeline for the first rate hike after 2006. However, the Fed had dovish and soothing session yet again. Though the Fed eliminated the word ‘patient’ from its statement, it promised not to be ‘impatient’ in taking this vital decision (read: 3 Rate-Sensitive ETFs to Watch Post Fed Meeting).
In the latest meeting, the Fed cautioned about the ‘moderation’ in U.S. economic growth and indicated that interest rates will rise at a sluggish pace than previously forecast. To add to this, the Fed affirmed that it would wait for ‘further improvement’ in the labor market.
The organization would also look for evidences that would confirm the return of U.S. inflation to its 2% goal over the medium term. If this was not enough, the Fed cut its median funds rate forecast from 1.125% to 0.625% for the end of this year. The market took this as the possibility of a delayed rate hike, at least not before its September meeting.
Though the chance of a June rate hike cannot be completely overruled, it presently seems ‘unlikely’ given the recent ascent of the greenback, an oil price slump and slowing U.S. economic growth.
However, the dovish sentiment altogether led to some big moves in various markets in a very short time period, as traders started to adjust their expectations for this extremely important policy. In particular, investors saw some volatility in the bond and currency markets, although some equities were in focus as well.
Yield on the benchmark 10-Year U.S. Treasury note declined to 1.93% following the announcement on March 18 from 2.06% the day before. Stocks turned green soon, with the Dow, S&P and Nasdaq adding 1.27%, 1.22% and 0.92% respectively. The move was pronounced in the currency market with the greenback plunging the most since 2009. The dollar index fell over 2%.
Below, we discuss a few ETFs which were among the biggest movers after the Fed minutes, and which could continue to be in focus as there appears no rush in normalizing 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 of 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% collectively in Japanese yen and British pound. The fund has managed an asset base of $1.38 billion so far while sees an average daily volume of 2 million shares. It charges 80 bps in total fees and expenses. Due to intense selling pressure, this dollar ETF was down about 2% at the close of trading on March 18, 2015 (read: Can U.S. Dollar ETFs Continue to Surge in 2015?).
Gold Mining – The Gainer
Market Vectors Gold Miners ETF (GDX)
As soon as the dollar fell, commodity prices shot up. Gold, one of the vital precious metals, has witnessed most pricing gains since January. SPDR Gold Shares (GLD) tracking the gold bullion has added about 2% (as of March 18, 2015) while the largest big-cap gold mining ETF GDX has added about 5.1% during the same time frame. The latter saw more gains as it often trades as a leveraged play on gold (read: Will Gold Miner ETFs Dig Up Solid Returns in 2015?).
GDX is one of the popular gold mining ETFs in the market today with assets of $5.58 billion and a trading volume of roughly 50 million shares a day. The fund charges an expense ratio of 53 basis points a year. The fund, which holds 39 stocks in its basket, has invested 60.2% of the asset base in the top 10 holdings.
The fund has company-specific concentration risks with the top three holdings accounting for more than 25% of the basket. GDX is heavy on Canada with about 56.3% focus.
Emerging Markets – Another Winner
Vanguard Emerging Markets ETFs (VWO)
Asian stocks are also nearing a six-month high following the Fed comments thanks to the strengthening of risk-on trade sentiments. Not only this, Asian stocks have seen ‘their best session in 18 months’ on March 18. iShares MSCI All Country Asia ex Japan (AAXJ) has added about 1.7% in the key trading session.
Overall, the emerging market space reacted positively. VWO is the most popular emerging market ETF with about $44.6 billion in assets. The fund trades in volume of more than 13 million shares a day, ensuring narrow bid/ask spreads and low trading costs. The product holds 1,016 stocks in its basket. Asia takes about 60% of the total assets of the fund. The fund carries low company-specific concentration risks. VWO was up 2.6% on March 18.
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