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ETF Winners Following Fed Minutes

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There was no sparkle in the latest Fed minutes. The only point of interest for investors may be the distinct division in Fed officials into two groups – one that sees the U.S. economy as sturdy enough to digest a rate hike and the other that wants further evidence of economic well-being

Investors should be reminded that contrary to the June meeting, the Fed was far more confident about the economy (read: A Positive-But-Cautious Fed Meet: Buy These ETFs).

Positive Bias to Rate Hike

The reasons for the optimism were a strengthening labor market and some decent U.S. economic data (read: U.S. Job Growth Momentum Continues: ETFs to Buy).

Also, a few Fed officials seem anxious about the overvaluation in some securities including stocks amid sustained low rates. According to them, investors may misjudge securities and inflate the market unnecessarily in a low rate environment and thus a hike is needed soon.

Negative Bias to Rate Hike

However, given the new-found optimism, the Fed indicated that inflation in the economy has stalled and is likely to stay subdued in the near term. However, it would pick up in the medium term as energy prices recover from their rock-bottom levels and the labor market gains more traction.

A skeptic group wished “to defer another increase in the federal funds rate” until they are more confident that inflation is moving steadily closer to 2%, as per the minutes of the meeting.

Apart from inflation issues, global economic conditions especially after Brexit, are being considered by the Fed. Also, muted business investment is a cause of concern. Real GDP of the economy was also modest in the second quarter.

What to Expect Ahead?

Prior to the release of the minutes, the New York Fed President William Dudley indicated that the hike is quite possible next month. Atlanta Fed President Dennis Lockhart had said that the current situation is favorable for “at least one” rate increase by the end of this year (read: ETFs to Watch as Fed Members Indicate Rate Hike in September).

Expectedly, the broader investing world started taking positions following such remarks, speculating a sooner-than-expected hike. Stocks ended lower on August 16 but things took a turn post minutes’ release. As per an analyst, “the minutes contained more concrete indications that a consensus to raise rates is slowly building.”

Futures traders now see just 18% chance of a rate hike in September, 20% possibilities for a November move and 50% by December.

Market Impact

With investors seeing almost no material threat from a rate hike, stocks gained life as key U.S. indices were in the green. Among the top ETFs, investors saw SPY, DIA and QQQ add about 0.2% each.

Some subtle moves in various markets and asset classes were also noticed. Dollar ETF PowerShares DB US Dollar Bullish Fund (UUP) gained about 0.1% on August 17.

ETF Winners

Below we highlight a few ETF winners post minutes.

Utility

The utility sector is a rate-sensitive one and performs well in a low rate environment. Many utility ETFs gained over 1% on August 17, withUtilities Select Sector SPDR ETF (XLU) gaining about 1.5%.

Long-term U.S. Treasury

U.S. sovereign bond prices recorded gains on the Fed minutes while the yield on the 10-year U.S. Treasury note slipped to 1.56% from 1.57% recorded the earlier day. iShares 20+ Year Treasury Bond (TLT) gained about 0.6% while leveraged long-term Treasury ETF Direxion Daily 20+ Year Treasury Bull 3X ETF TMF added about 1.2%.

Dividend

In quest of yields, dividend ETFs were in favor, withiShares Select Dividend DVY adding over 0.6%.

Inverse Volatility

As stocks regained strength, volatility ETFs took a backseat. As a result, inverse volatility ETF ProShares Short VIX Short-Term Futures (SVXY - Free Report) added about 2.6% on August 17.

Gold

Though the U.S. dollar was higher on August 17, the safe-haven precious metal gold also gained slightly. Gold bullion ETF SPDR Gold Shares GLD also added about 0.3% gains after hours. Gold’s gains indicate that investors are not taking the possibility of a September hike too seriously. Notably, the price of gold shares an inverse reltionship with the U.S. dollar.

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