The global economy is on an edge right now, waiting for decisions from the presidential election, the OPEC meeting on output freeze and the Federal Reserve on policy tightening. In fact, November can prove to be a real game changer for the rest of the year.
Uncertainty Resurfacing Prior to Election
This is especially true given the recent FBI probe into democratic candidate Hilary Clinton's use of a private server. The news lately diminished Clinton’s popularity to some extent as an ABC News/Washington Post tracking poll released on Sunday indicated that Clinton is ahead with just 46% to 45% advantage -- thinner than Saturday's 2-point superiority of Clinton.
Though chances are rife that America will still see Clinton wining on November 8, tensions about any sudden changes will not spare investors.
So, volatility ETFs like iPath S&P 500 VIX ST Futures ETN VXX will be in focus in the near term. A few other ETFs that should be in focus include iShares MSCI Mexico Capped EWW – a Clinton-friendly investment – and SPDR Gold Shares GLD – a Trump-friendly bet. In any case, as long as election-related uncertainties rule the market, gold the safe haven is likely to prevail (read: Fed or Trump: Who Will Decide the Fate of Gold ETFs?).
Oil Output Curb Deal Uncertain
Coming to the oil patch, an output cut deal is highly anticipated at the end of the month. But recent developments still signal at precariousness. In a meeting in Vienna at October end, non-OPEC oil producers including Azerbaijan, Brazil, Kazakhstan, Mexico, Oman and Russia declined to commit to curb or even freeze output until OPEC decides on it. Whereas among OPEC members, Iraq and Iran appear to be the deterrents to cut some concrete deal.
If this was not enough, OPEC's oil output is likely to hit a record high in October, as per a Reuters’ survey. A rebound in Nigerian and Libyan production rising from disruptions and higher exports by Iraq were behind this rise. The trend could spoil the moods of oil bulls who are betting big on oil price recovery (read: Inverse Oil ETFs in Focus as Iraq Threatens OPEC Deal).
With this kind of backdrop, both long and short oil ETFs are to be followed closely. Examples of some long oil ETFs are United States Oil Fund USO and VelocityShares 3x Long Crude Oil ETN UWTI while bear ETFs include VelocityShares 3x Inverse Crude Oil ETN DWTI) and PowerShares DB Crude Oil Double Short ETN DTO.
Fed Likely to Hike in December
While the November Fed meeting will likely be a boring one, December should show some actions. The year 2016 went on seeing no policy tightening from the Fed after a liftoff in December 2015. So, with the U.S. economy gaining traction, at least a 25-bps hike is highly warranted in the December meeting (read: 6 ETF Areas to Watch as Fed Meeting Starts).
Plus, the investors will be keen on hearing some additions in Fed officials’ comments to make their future moves. Sensing the impending Fed move, the yield on 10-year U.S. Treasury notes rose 21 bps to 1.84% in October.
The adverse impact of rising rates is likely to be noticed in income investing. Most of the dividend ETFs including iShares Select Dividend ETF DVY and ALPS Sector Dividend Dogs ETF SDOG could come under pressure if bond yields continue to rise (read: Dogs to Fall Short of Dow? ETFs in Focus).
The scenario will likely be the same for bond investing. So, investors can park their money in the high-yield corners of the segment. WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund or Highland/iBoxx Senior Loan ETF SNLN) could be the bet of the hour.
Low Volatility ETFs to Favor?
With all the uncertainties looming, investors may try out some low volatile ETFs. In this regard small-cap low volatile ETFs like PowerShares S&P SmallCap Low Volatility Portfolio ETF XSLV,SPDR Russell 2000 Low Volatility ETF SMLV and PowerShares S&P MidCap Low Volatility Portfolio ETF XMLV should be on investors’ radar.
Investors should note that smaller-cap stocks are best reflected by the strength in the domestic economy and do not get perturbed by a stronger U.S. dollar due to lesser exposure in foreign lands.
Also, long/short ETFs like Reality Shares Divcon Dividend Defender ETF DFND could come to investors’ rescue. The fund features a hedged (long/short) equity portfolio and invests 75% of its portfolio in large-cap U.S. companies with the highest probability of raising their dividends within a year, based on their DIVCON dividend health scores.
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