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After big first-half gains, Wall Street lost momentum in recent months on worries over longer-than-expected higher interest rates. With just a few days left to end the first nine months of 2023, the Nasdaq Composite Index is outperforming, gaining 26.8%. Meanwhile, the S&P 500 and Dow Jones Industrial have risen 13% and 2.6%, respectively.
Below, we discuss some of the hot events of the first nine months of this year that influenced the market in a big way:
Hawkish Fed
The Federal Reserve, in its latest meeting, kept interest rates steady at a 22-year high in the range of 5.25% to 5.5% but signaled one more hike this year. Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong and the unemployment rate has remained low. The U.S. banking system is also deemed to be sound and resilient.
Though inflation is easing, it remains elevated and above the Fed’s 2% target. The ongoing strength in the economy and the surging oil prices threaten to revive inflationary pressure. In such a scenario, betting on interest rate hedge ETFs could be beneficial (read: A Guide to Higher Interest Rates and ETFs).
Simplify Interest Rate Hedge ETF (PFIX - Free Report) seeks to provide a hedge against a sharp increase in long-term interest rates and benefit from market stress when fixed-income volatility increases, while providing the potential for income. It buys put options on longer-term Treasury bonds to offer “the most liquid and the most cost-efficient way of getting interest rate protection.” Simplify Interest Rate Hedge ETF is the first ETF providing a simple, direct and transparent interest rate hedge. PFIX has accumulated $227.4 million in its asset base and trades in an average daily volume of 165,000 shares. It charges 50 bps in annual fees.
Treasury Plunge
The ultra-popular iShares 20+ Year Treasury Bond ETF (TLT - Free Report) , with an asset base of $39 billion and an average daily volume of around 25.5 million shares, is suffering its most significant drawdown to date due to the Fed's sustained high interest rates. The ETF declined 48% from its peak in 2020 and is currently trading at levels not seen since 2011, based on Bloomberg's data compilation. Concurrently, data from IHS Markit Ltd. indicates a rising trend of bets against the fund, with short interest relative to its outstanding shares at a peak for the past month.
TLT has dropped about 10% so far this year, which follows a 33% plunge last year and a 6% drop in 2021. Other long-duration funds have also suffered, with the Vanguard Extended Duration Treasury ETF (EDV - Free Report) down 14% in 2023, and the PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ - Free Report) off by more than 15%.
Both 10-year and 30-year Treasury yields touched significant multi-year highs. The 10-year yields surged to 4.53%, a level not seen since October 2007, while the 30-year yield reached 4.64%, its highest level since April 2011. This has led to a surge in ETFs that bet against U.S. Treasury bonds.
Technology Wave
The technology sector made a solid comeback in the first half of 2023, buoyed by artificial intelligence (AI) craze, a rise in so-called “magnificent seven” stocks and a surge in cryptocurrency. These trades fizzled in the third quarter as bets for higher interest rates for a longer period rose. Still, technology has turned out to be the most profitable sector so far this year.
Wedbush analyst Dan Ives believes that the technology sector is poised to weather a prolonged phase of increased interest rates. Ives eyes the "biggest tech revolution in 30 years" on the horizon, with the new tech bull market kicking off. Additionally, any prospective reductions in interest rates – with the market forecasting at least two for the next year – coupled with the ongoing rise of AI and the wave of optimism for crypto from institutional investors will act as a major tailwind.
Valkyrie Bitcoin Miners ETF (WGMI - Free Report) , which provides exposure to the bitcoin mining industry, has more than doubled so far this year. It is an actively managed ETF that invests at least 80% of its net assets (plus borrowings for investment purposes) in securities of companies that derive at least 50% of their revenues or profits from bitcoin mining operations and/or from providing specialized chips, hardware and software or other services to companies engaged in bitcoin mining. Valkyrie Bitcoin Miners ETF has amassed $14.3 million in its asset base and charges 75 bps in annual fees (read: Bitcoin Miner ETF Tops in First Nine Months: 5 Best Stocks).
Dollar Surge
The U.S. dollar is experiencing significant gains in recent weeks driven by the combination of surging oil prices and the speculation of high interest rates for an extended period. Notably, the dollar has formed its first "golden cross" since July 2021, which implies that it is about to move higher, causing troubles for the stock market. A "golden cross" is a technical pattern characterized by the 50-day moving average surpassing the 200-day moving average. This signal is widely followed by technical analysts and often, although not invariably, signifies the emergence of momentum in a particular direction.
According to analysis from Dow Jones Market Data, in the three months following a golden cross, the dollar typically experiences an average gain of 1.9%, trading higher approximately 79.2% of the time. Per FactSet data, the dollar index appreciated by roughly 25% after reaching the golden cross in July 2021 from around 91 to nearly 115 in late September 2022, its strongest level in two decades (read: 5 ETFs to Tap on the Longest Dollar's Rally in Years).
Also, the Bloomberg Dollar Spot Index has been on the longest winning run since 2005 while the ICE dollar index has been on the longest advance in nine years. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long USD Currency Portfolio Index - Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. The fund has managed an asset base of $506.7 million while charging 77 bps in annual fees. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Oil Tide
After lagging for most of this year, oil has been surging in recent months on tightening supply conditions and the prospect of higher demand. Both benchmarks reached a 10-month high with more upside potential left.
The global oil market is expected to face the biggest deficit in over a decade and comes as the two major oil-producing nations, Saudi Arabia and Russia, extended their voluntary cuts by the end of the year. On the other hand, “world oil demand is scaling record highs” said the International Energy Agency in a recent note. Strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity are driving demand higher.
Investors seeking to tap the strength in oil prices may bet on the ETFs that are directly linked to the futures contracts. United States Oil Fund (USO - Free Report) , United States Brent Oil Fund (BNO - Free Report) , Invesco DB Oil Fund (DBO - Free Report) and United States 12 Month Oil Fund (USL - Free Report) are popular oil ETFs that could be interesting plays to directly deal in the futures market in the coming months.
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Top ETF Stories of the Nine Months of 2023
After big first-half gains, Wall Street lost momentum in recent months on worries over longer-than-expected higher interest rates. With just a few days left to end the first nine months of 2023, the Nasdaq Composite Index is outperforming, gaining 26.8%. Meanwhile, the S&P 500 and Dow Jones Industrial have risen 13% and 2.6%, respectively.
Below, we discuss some of the hot events of the first nine months of this year that influenced the market in a big way:
Hawkish Fed
The Federal Reserve, in its latest meeting, kept interest rates steady at a 22-year high in the range of 5.25% to 5.5% but signaled one more hike this year. Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong and the unemployment rate has remained low. The U.S. banking system is also deemed to be sound and resilient.
Though inflation is easing, it remains elevated and above the Fed’s 2% target. The ongoing strength in the economy and the surging oil prices threaten to revive inflationary pressure. In such a scenario, betting on interest rate hedge ETFs could be beneficial (read: A Guide to Higher Interest Rates and ETFs).
Simplify Interest Rate Hedge ETF (PFIX - Free Report) seeks to provide a hedge against a sharp increase in long-term interest rates and benefit from market stress when fixed-income volatility increases, while providing the potential for income. It buys put options on longer-term Treasury bonds to offer “the most liquid and the most cost-efficient way of getting interest rate protection.” Simplify Interest Rate Hedge ETF is the first ETF providing a simple, direct and transparent interest rate hedge. PFIX has accumulated $227.4 million in its asset base and trades in an average daily volume of 165,000 shares. It charges 50 bps in annual fees.
Treasury Plunge
The ultra-popular iShares 20+ Year Treasury Bond ETF (TLT - Free Report) , with an asset base of $39 billion and an average daily volume of around 25.5 million shares, is suffering its most significant drawdown to date due to the Fed's sustained high interest rates. The ETF declined 48% from its peak in 2020 and is currently trading at levels not seen since 2011, based on Bloomberg's data compilation. Concurrently, data from IHS Markit Ltd. indicates a rising trend of bets against the fund, with short interest relative to its outstanding shares at a peak for the past month.
TLT has dropped about 10% so far this year, which follows a 33% plunge last year and a 6% drop in 2021. Other long-duration funds have also suffered, with the Vanguard Extended Duration Treasury ETF (EDV - Free Report) down 14% in 2023, and the PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ - Free Report) off by more than 15%.
Both 10-year and 30-year Treasury yields touched significant multi-year highs. The 10-year yields surged to 4.53%, a level not seen since October 2007, while the 30-year yield reached 4.64%, its highest level since April 2011. This has led to a surge in ETFs that bet against U.S. Treasury bonds.
Technology Wave
The technology sector made a solid comeback in the first half of 2023, buoyed by artificial intelligence (AI) craze, a rise in so-called “magnificent seven” stocks and a surge in cryptocurrency. These trades fizzled in the third quarter as bets for higher interest rates for a longer period rose. Still, technology has turned out to be the most profitable sector so far this year.
Wedbush analyst Dan Ives believes that the technology sector is poised to weather a prolonged phase of increased interest rates. Ives eyes the "biggest tech revolution in 30 years" on the horizon, with the new tech bull market kicking off. Additionally, any prospective reductions in interest rates – with the market forecasting at least two for the next year – coupled with the ongoing rise of AI and the wave of optimism for crypto from institutional investors will act as a major tailwind.
Valkyrie Bitcoin Miners ETF (WGMI - Free Report) , which provides exposure to the bitcoin mining industry, has more than doubled so far this year. It is an actively managed ETF that invests at least 80% of its net assets (plus borrowings for investment purposes) in securities of companies that derive at least 50% of their revenues or profits from bitcoin mining operations and/or from providing specialized chips, hardware and software or other services to companies engaged in bitcoin mining. Valkyrie Bitcoin Miners ETF has amassed $14.3 million in its asset base and charges 75 bps in annual fees (read: Bitcoin Miner ETF Tops in First Nine Months: 5 Best Stocks).
Dollar Surge
The U.S. dollar is experiencing significant gains in recent weeks driven by the combination of surging oil prices and the speculation of high interest rates for an extended period. Notably, the dollar has formed its first "golden cross" since July 2021, which implies that it is about to move higher, causing troubles for the stock market. A "golden cross" is a technical pattern characterized by the 50-day moving average surpassing the 200-day moving average. This signal is widely followed by technical analysts and often, although not invariably, signifies the emergence of momentum in a particular direction.
According to analysis from Dow Jones Market Data, in the three months following a golden cross, the dollar typically experiences an average gain of 1.9%, trading higher approximately 79.2% of the time. Per FactSet data, the dollar index appreciated by roughly 25% after reaching the golden cross in July 2021 from around 91 to nearly 115 in late September 2022, its strongest level in two decades (read: 5 ETFs to Tap on the Longest Dollar's Rally in Years).
Also, the Bloomberg Dollar Spot Index has been on the longest winning run since 2005 while the ICE dollar index has been on the longest advance in nine years. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long USD Currency Portfolio Index - Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. The fund has managed an asset base of $506.7 million while charging 77 bps in annual fees. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Oil Tide
After lagging for most of this year, oil has been surging in recent months on tightening supply conditions and the prospect of higher demand. Both benchmarks reached a 10-month high with more upside potential left.
The global oil market is expected to face the biggest deficit in over a decade and comes as the two major oil-producing nations, Saudi Arabia and Russia, extended their voluntary cuts by the end of the year. On the other hand, “world oil demand is scaling record highs” said the International Energy Agency in a recent note. Strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity are driving demand higher.
Investors seeking to tap the strength in oil prices may bet on the ETFs that are directly linked to the futures contracts. United States Oil Fund (USO - Free Report) , United States Brent Oil Fund (BNO - Free Report) , Invesco DB Oil Fund (DBO - Free Report) and United States 12 Month Oil Fund (USL - Free Report) are popular oil ETFs that could be interesting plays to directly deal in the futures market in the coming months.