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Tech Selloff & Fed Meeting Put These ETFs in Focus
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The week started with a brutal stock market session as major benchmarks finished the day in deep red. The S&P 500 and the Nasdaq logged their worst day since Feb 8 while the Dow Jones Industrial Average fell more than 400 points its biggest fall since Mar 1, in Monday trading.
In fact, the steep decline eroded all the gains made this year from the Dow Jones and sent the index into red from a year-to-date look.
The downswing has mainly been blamed on the technology selloff triggered by Facebook’s data breach news. A political consultancy that worked on U.S. President Donald Trump’s 2016 campaign gained access to data on 50 million Facebook profiles without their authorization. Shares of FB tumbled 6.8% on the day, marking their biggest one-day drop since Mar 26, 2014. The massive decline pushed the other stocks in the FANG group and the broad sector lower (read: New Triple Leveraged FANG ETFs: Should You Buy?).
Added to the concern is the Federal Reserve’s two-day meeting, which ends on Wednesday, that is being headed by the new chairman Jerome Powell. The market is predicting that the Fed will raise interest rates for the fifth time since Dec 2015. Per the latest CME Group's FedWatch tool, the odds for a March rate hike by 25 bps are greater than 90%.
While this is well absorbed by the stock market, Trump’s spending spree could compel the Fed to move for speedy rates hike. This is because the massive $1.5 trillion tax cut and a bipartisan $300 billion spending plan could overheat the robust labor market, flaring up inflation. This would prompt the Fed to increase its rate hike projections from three to four for this year. Last month, Powell in its first testimony to Congress revived fears of more interest rate increases this year, leading to a bloodbath in the stock market (read: Welcome Powell Era With These ETFs).
Powell had showed enough confidence in the economic and inflation outlook, signaling that the Fed could accelerate its pace of monetary tightening with four interest rate hikes this year rather than the three penciled in. Majority of major Wall Street firms, including Barclays, JP Morgan (JPM - Free Report) , Goldman Sachs (GS - Free Report) and UBS, are also expecting the Fed to call four increases in interest rates this year. As such, investors are keenly awaiting the Fed’s guidance on the future rate trajectory.
Market Impact
The events have led to risk-off trading with lower risk securities, including precious metals and bonds, in vogue. A few ETFs were severely impacted by the Facebook plunge while a few were in focus ahead of the Fed meeting. Below are four ETFs that are especially volatile in the wake of the Facebook woes and amid uncertainty regarding the future of the interest rates hike:
The Internet ETF was the worst performer in the tech space on the day, losing 2.4% on elevated volume of 70,000 shares compared with 48,000 shares on average.
The fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. It holds about 82 stocks in its basket with AUM of $687 million while charging 60 bps in fees per year. In terms of industrial exposure, Internet software and services makes up for 51.7% share in the basket, followed by Internet retail (39.5%). PNQI has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Best Performing ETFs of 9-Year Bull Run).
While volatility products have been terrible performers over the medium and long terms due to a contangoed market and a steep roll cost, they are intriguing picks during periods of turmoil or uncertainty. That said, VXX gained 9.8% in the session while volume hit 58.1 million shares, well above the 47.5 million average.
The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility in the S&P 500 index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second months VIX futures contracts. The note charges 89 bps in fees per year and has amassed $749.3 million in AUM.
Gold is often viewed as a store of value and a hedge against market turmoil. The product tracking this bullion like GLD could be an interesting pick to play the market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $35.5 billion and expense ratio of 0.40%.
However, the ETF added just 0.2%, exchanging just 4.3 million shares in hand. The upside was capped in anticipation of a hawkish stance in the Fed meeting that would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets do (read: What Lies Ahead for Gold ETFs?).
The U.S. government bonds tracking the long end of the yield curve often carry a safe haven status. The flight-to-safety on tech sell-off led these bonds higher in early trading but soon eroded its gain on extra rate hike concern. As such, the ultra-popular long-term Treasury ETF – TLT – was down 0.3% on the day on below-average daily volume (read: Trade War Fears Loom: Protect Your Portfolio With These ETFs).
It tracks the ICE U.S. Treasury 20+ Year Bond Index and has AUM of $6.2 billion. Expense ratio comes in at 0.15%. Holding 30 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 25.84 years and effective duration of 17.48 years.
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Tech Selloff & Fed Meeting Put These ETFs in Focus
The week started with a brutal stock market session as major benchmarks finished the day in deep red. The S&P 500 and the Nasdaq logged their worst day since Feb 8 while the Dow Jones Industrial Average fell more than 400 points its biggest fall since Mar 1, in Monday trading.
In fact, the steep decline eroded all the gains made this year from the Dow Jones and sent the index into red from a year-to-date look.
The downswing has mainly been blamed on the technology selloff triggered by Facebook’s data breach news. A political consultancy that worked on U.S. President Donald Trump’s 2016 campaign gained access to data on 50 million Facebook profiles without their authorization. Shares of FB tumbled 6.8% on the day, marking their biggest one-day drop since Mar 26, 2014. The massive decline pushed the other stocks in the FANG group and the broad sector lower (read: New Triple Leveraged FANG ETFs: Should You Buy?).
Added to the concern is the Federal Reserve’s two-day meeting, which ends on Wednesday, that is being headed by the new chairman Jerome Powell. The market is predicting that the Fed will raise interest rates for the fifth time since Dec 2015. Per the latest CME Group's FedWatch tool, the odds for a March rate hike by 25 bps are greater than 90%.
While this is well absorbed by the stock market, Trump’s spending spree could compel the Fed to move for speedy rates hike. This is because the massive $1.5 trillion tax cut and a bipartisan $300 billion spending plan could overheat the robust labor market, flaring up inflation. This would prompt the Fed to increase its rate hike projections from three to four for this year. Last month, Powell in its first testimony to Congress revived fears of more interest rate increases this year, leading to a bloodbath in the stock market (read: Welcome Powell Era With These ETFs).
Powell had showed enough confidence in the economic and inflation outlook, signaling that the Fed could accelerate its pace of monetary tightening with four interest rate hikes this year rather than the three penciled in. Majority of major Wall Street firms, including Barclays, JP Morgan (JPM - Free Report) , Goldman Sachs (GS - Free Report) and UBS, are also expecting the Fed to call four increases in interest rates this year. As such, investors are keenly awaiting the Fed’s guidance on the future rate trajectory.
Market Impact
The events have led to risk-off trading with lower risk securities, including precious metals and bonds, in vogue. A few ETFs were severely impacted by the Facebook plunge while a few were in focus ahead of the Fed meeting. Below are four ETFs that are especially volatile in the wake of the Facebook woes and amid uncertainty regarding the future of the interest rates hike:
PowerShares Nasdaq Internet Portfolio (PNQI - Free Report)
The Internet ETF was the worst performer in the tech space on the day, losing 2.4% on elevated volume of 70,000 shares compared with 48,000 shares on average.
The fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. It holds about 82 stocks in its basket with AUM of $687 million while charging 60 bps in fees per year. In terms of industrial exposure, Internet software and services makes up for 51.7% share in the basket, followed by Internet retail (39.5%). PNQI has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Best Performing ETFs of 9-Year Bull Run).
iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report)
While volatility products have been terrible performers over the medium and long terms due to a contangoed market and a steep roll cost, they are intriguing picks during periods of turmoil or uncertainty. That said, VXX gained 9.8% in the session while volume hit 58.1 million shares, well above the 47.5 million average.
The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility in the S&P 500 index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second months VIX futures contracts. The note charges 89 bps in fees per year and has amassed $749.3 million in AUM.
SPDR Gold Trust ETF (GLD - Free Report)
Gold is often viewed as a store of value and a hedge against market turmoil. The product tracking this bullion like GLD could be an interesting pick to play the market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $35.5 billion and expense ratio of 0.40%.
However, the ETF added just 0.2%, exchanging just 4.3 million shares in hand. The upside was capped in anticipation of a hawkish stance in the Fed meeting that would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets do (read: What Lies Ahead for Gold ETFs?).
iShares 20+ Year Treasury Bond ETF (TLT - Free Report)
The U.S. government bonds tracking the long end of the yield curve often carry a safe haven status. The flight-to-safety on tech sell-off led these bonds higher in early trading but soon eroded its gain on extra rate hike concern. As such, the ultra-popular long-term Treasury ETF – TLT – was down 0.3% on the day on below-average daily volume (read: Trade War Fears Loom: Protect Your Portfolio With These ETFs).
It tracks the ICE U.S. Treasury 20+ Year Bond Index and has AUM of $6.2 billion. Expense ratio comes in at 0.15%. Holding 30 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 25.84 years and effective duration of 17.48 years.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>