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Will The Fed And China Bring GLD Back Up?

Summary The FOMC will convene again next week. China has been stocking up on gold in the past few years. Will China’s strong demand for the yellow metal save GLD? The U.S. GDP for Q2 will also be released this week. Will it move the price of GLD? The recent plunge in the price of SPDR Gold Trust (NYSEARCA: GLD ) brought the gold ETF to its lowest level since 2010. The weakness of China’s economy, the expectations of a rate hike by the Federal Reserve, the recovery of the U.S. dollar , and the general bearish sentiment in the commodities markets are keeping gold down. Even the recent news of the high growth in China’s gold accumulation hasn’t stopped the price of GLD from falling. Let’s examine some of these issues with respect to the general direction of GLD. The Fed and GLD The bets around the first rate hike of the Federal Reserve continue. For now, the market still places very low odds on a rate hike in September: the implied probabilities are only 19% — slightly higher than back in late June, albeit this probability is still low; for the October meeting the odds are 36% and for December the odds are 56%. St. Louis Fed President Bullard recently stated that the odds of a rate hike in September are actually better than even. Also, the Fed inadvertently published that staff economists also expect a rate gain this year. In any case, a rate hike, even just 0.25%, will have more of an impact on the market expectations, which could drive further down the price of GLD. In a related story, the San Francisco Fed released a paper , in which the current U.S. inflation does not signal a statistically significant deviation from the inflation target, considering the high monthly volatility in inflation estimates. This paper is optimistic about the progress of U.S. inflation that will eventually rise to the Fed’s target of 2%, even though it wasn’t able to bring inflation to this level over the past three years. This week, the FOMC will convene again. The FOMC isn’t expected to change its policy in the upcoming meeting, but it will show if the FOMC members are turning more dovish and getting ready for liftoff in September. One factor, among several, that could impact members’ decision about the timing of the rate hike is the upcoming GDP report for the second quarter. The current expectations are for the GDP for Q2 to show a growth rate of 2.7% — any negative surprise of lower growth rate could reduce the odds of a rate hike anytime soon and tilt the scales back to the doves in the Fed. China stocking up on gold China has finally revealed the amount of gold it has been stocking up in the past several years. The amount of gold rose from 1,054 tons back in April 2009 to 1,658 tons in June 2015 – 57% increase during the entire period or an average annual gain of around 8%. This puts China as the fifth biggest hoarder of gold among all countries. China also bought gold at a faster pace than any other country. This accumulation rate seems impressive, but a more detailed examination reveals the country has also increased its foreign exchange reserves during that period from a net worth of $2,008 billion to around 3,609 billion as of June 2015 for an 84% growth. But even if we were to consider the net value of gold, which also grew during that period (back in April 2009 gold price was $890 per ounce) then the value of China’s gold reserves from its foreign exchange reserves only inched up from 1.4% to 1.5%. So it remained relatively flat. In other words, the country hasn’t increased its share of gold from total foreign reserves. Moreover, China is already facing too many problems in keeping up the high surplus in its current account to further grow its foreign reserves. China’s economic growth is on shaky ground and so relying on China to drive GLD’s price back up to its former glory days may be questionable at best. Despite the negative sentiment related to the gold market, GLD could surprise and make short-term recoveries, especially if the FOMC were to present a more dovish statement and the U.S. GDP comes in short of market expectations. Even so, it will need a real change in the direction of the U.S. economy for the FOMC not to raise rates this year. Finally, as long as the FOMC considers normalizing its monetary policy in the coming months, GLD’s long-term outlook doesn’t seem positive. For more please see: Gold’s Flash Crash – What Happened to My Precious (Metal)? Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

More Interest Rate Hedged ETFs Come To Market

Bond ETFs could take a hit in a rising interest rate environment. BlackRock’s iShares launches two new interest rate hedged bond ETFs. A look at the iShares Interest Rate Hedged Emerging Markets Bond ETF and Interest Rate Hedged 10+ Year Credit Bond ETF to generate yields and hedge against higher rates. With Treasury yields rising in anticipation of the Federal Reserve potentially boosting interest rates later this year, issuers of exchange traded funds continue to meet advisors and investors for alternative fixed income exposure with interest rate hedged ETFs. BlackRock’s (NYSE: BLK ) iShares, the world’s largest ETF issuer, doubled the size of its interest rate hedged ETF lineup with the debuts of iShares Interest Rate Hedged Emerging Markets Bond ETF (NYSEArca: EMBH ) and the iShares Interest Rate Hedged 10+ Year Credit Bond ETF (NYSEArca: CLYH ) . Both are actively managed funds. Unlike traditional bond ETFs, the rate-hedged bond ETFs try to mitigate the negative effects of a rising rate environment through shorting Treasury futures to match the overall duration of their diversified bond holdings. Looking further out, these types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment, especially as the Federal Reserve plans on hiking rates sometime later this year. The iShares Interest Rate Hedged 10+ Year Credit Bond ETF “seeks to provide exposure to long-term U.S. investment grade bonds while mitigating interest rate risk by holding CLY (iShares 10+ Year Credit Bond ETF) and short positions in interest rate swaps,” according to iShares . Nearly two-thirds of CLYH’s bond holdings have maturities of 20 years or more with another 16% having maturities of 15 to 20 years. Forty-six of the new ETF’s holdings are rated BBB with another 33% rated A and 10.4% carrying AA ratings. The iShares Interest Rate Hedged Emerging Markets Bond ETF holds the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB ) , the largest emerging markets bond ETFs, short positions in interest rate swaps. EMB is a popular yield play with a 30-day SEC yield of 5.04%, according to iShares data , but an effective duration of 7.24 years makes the ETF vulnerable to hawkish changes in Fed policy. EMBH helps alleviate that concern with an effective duration of just 0.22 years. “iShares interest rate hedged ETFs are the industry’s first actively managed interest rate hedged products that can potentially benefit from the established liquidity of existing bond funds. By holding shares of EMB and CLY in combination with interest rate swaps, EMBH and CLYH provide easy access to cost effective potential solutions for investors who are attempting to mitigate interest rate risk,” according to iShares. iShares introduced its first rate hedged ETFs in May 2014, the iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH ) and the iShares Interest Rate Hedged High Yield Bond ETF (NYSEArca: HYGH ) . Tom Lydon’s clients own shares of EMB. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

A Small-Cap ETF With Big Dividend Growth Potential

Summary Small-capitalization stocks have rebounded this year. A small-cap ETF that targets dividend growers. How the ProShares Russell 2000 Dividend Growers ETF compares to the benchmark Russell 2000. By Todd Shriber & Tom Lydon Small-caps are rebounding this year as highlighted by a gain of 4.1% for the iShares Russell 2000 ETF (NYSEARCA: IWM ) , the largest small-cap ETF. That is well ahead of the 2.9% returned by the S&P 500 this year. Investors looking for a more conservative, income-oriented approach to the Russell 2000, the benchmark U.S. small-cap index, have a compelling option in the ProShares Russell 2000 Dividend Growers ETF (NYSEARCA: SMDV ) . SMDV, which debuted in February, tracks the Russell 2000 Dividend Growth Index. That index includes small-cap firms with dividend increase streaks of at least a decade. Index constituents are screened for liquidity and dividend status, then selected and equal-weighted subject to a maximum sector weight of 30%, according to Russell Investments. Recent data indicate income investors should give small-caps and the corresponding exchange-traded funds a new look. “From the end of 2013 there has been a 10.2% increase in the number of issues paying a dividend in the S&P SmallCap 600,” according to S&P Dow Jones Indices . SMDV has returned half a percent since coming to market. While that is well behind the returns from the traditional Russell 2000 Index, investors should remember that the fund offers a more conservative approach to small-caps, with a superior yield to the Russell 2000. For example, SMDV’s 30-day SEC yield is 2.22%, or nearly 100 basis points higher than the comparable metric on IWM. Then, there is the potential for dividend growth. “Much of the potential return differential of small cap dividend growers have over other small caps can be attributed to lower historical risk,” according to a ProShares note . “Not only have small cap dividend growers had lower volatility compared with the overall small cap space, they have also had lower drawdowns. It is ‘winning by not losing as much’ that has translated to better returns over time.” SMDV is somewhat sensitive to changes in interest rates by way of an almost 27% weight to the utilities sector, but the fund combats that with a 21.6% weight to financial services names. While financials have been an important source of U.S. dividend growth in recent years, small-caps from that sector offer an advantage when rates rise , because they are highly levered to profit-boosting increases in net interest margin. For the five years ended December 31, 2014, Russell 2000 dividend growers delivered return on equity of 13.4%, 360 basis points ahead of non-dividend growers, according to ProShares data. The index’s dividend growers also delivered EPS growth of 6.2%, compared to 6% for non-dividend growers. ProShares Russell 2000 Dividend Growers ETF (click to enlarge) Tom Lydon’s clients own shares of IWM. Disclosure: I am/we are long IWM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.