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First Fed Hike Puts These ETFs In Focus

Months of speculation and nail-biting hearsay about the timeline of the first rate hike in almost a decade finally ended yesterday thankfully, with neither shocks, nor surprises. The Fed pulled the trigger at long last, raising benchmark interest rates by a modest 25 bps to 0.25-0.50% for the first time since 2006, making it official that the U.S. economy is out of the woods; though still has miles to go. The step also sets the U.S. apart from other developed economies and had a great impact on the global currency market. The Fed believes that the possibility of further improvement in the labor market as well as in inflation is ripe at the current level. Muted inflation mainly due to stubbornly low oil prices has been an issue for long for the Fed. But in the 12 months through November, the core consumer price index grew 2% (matching the Fed’s target), the highest reading since May 2014 , followed by the 1.9% advancement in October. Unemployment rate fell to 5%, a more than seven-year low level. Average hourly earnings are rising of late. What’s more noteworthy was that the Fed did not move an inch from the ‘ gradual ‘ rate hike trajectory. Also, the central bank indicated that while the job market criteria is apparently accomplished, the Fed’s future focus would be on the inflation reading, which is yet to pick up at a sustained pace. Global growth worry is another factor, which is holding the Fed back from acting fast on tightening. Fed’s Projection The Fed lowered its 2015 projection for personal consumer expenditure inflation to 0.3-0.5% from 0.3-1.0% and 0.6-1.0% guided in September and June, respectively. The projections were also slashed for 2016 and 2017 from 1.5-2.4% to 1.2-2.1% and from 1.7-2.2% to 1.7-2.0%, respectively. The expectations for 2016 and 2017 real GDP growth have been ticked down to 2.0-2.7% from 2.1-2.8% guided in September (Fed’s June prediction for 2016 was 2.3-3.0%) and to 1.8-2.5% from 1.9-2.6%, respectively. However, the real GDP growth expectation for 2015 has been changed to 2.0-2.2% from 1.9-2.5% projected in September. As already discussed, unemployment was the true healer with its 2015 expectation being 5%, almost in line with the 4.9-5.2% expected in September. The coming two years will also see the same uptrend as estimates for 2016 were lowered from 4.5-5.0% to 4.3-4.9% while the same for 2017 remained unchanged at 4.5-5.0%. The notable changes were in the projection for the benchmark interest rate for 2015, 2016 and 2017. Fed’s funds rate for the longer run may be maintained at 3.0-4.0% but projection for 2015, 2016 and 2017 were changed from negative 0.1- positive 0.9% to 0.1-0.4%, from negative 0.1- positive 2.9% to 0.9-2.1% and from 1.0-3.9% to 1.9-3.4%, respectively. Market Impact However, the historic move did not mess up the market, as the investing world was prepared well ahead of the meeting. In fact, the Fed gave the global market enough time to digest the news when the central bank brought the December rate hike possibility back on to the table in October end. With no drama in the December meeting, the market is now focusing more on a sluggish rate hike, not just the hike itself. As a result, probability of a dovish rate hike trail ahead cheered equity investors almost across the globe. Even the highly vulnerable areas like emerging markets also tacked on gains during the Fed meeting. This produced a handful of surprise winners and losers post meeting. However, bonds obeyed the rule book and started diving as soon as the Fed enacted the lift-off. The two-year benchmark Treasury yield jumped 4 bps to 1.02% on December 16 – a five and a half year high. However, the yield on the 10-year Treasury note rose just 2 bps to 2.30% and yield on the long-term 30-year bonds saw a 2 bp nudge to 3.02%. All bond ETFs were in the red. Given this, we have highlighted ETF winners and losers from the Fed move: The PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) – Natural winner The U.S. dollar is a common winner following the lift-off. The U.S. dollar ETF UUP gained 0.04% after hours. The iShares MSCI Emerging Markets (NYSEARCA: EEM ) – Surprise Winner Emerging markets normally fall out of favor in a rising rate environment as investors dump these high-yielding, but risky, investing tools for higher yields at home. However, possibility of a gradual hike boosted the emerging market ETF EEM by about 2% on December 16. The fund added 0.2% after hours. The SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) – Natural Winner The regional bank sector was pleased by the Fed decision and the resultant rise in yields, as it tends to benefit from the steepening of the yield curve. As a result, regional bank ETF KRE was up about 1% and added 0.1% after hours. The Market Vectors Gold Miners ETF (NYSEARCA: GDX ) – Surprise Winner but Potential Loser As soon as the greenback gains, commodity prices fall. Gold, one of the key precious metals, might have gained from the slower hike bet, but is likely to lose ahead. The SPDR Gold Trust (NYSEARCA: GLD ) tracking the gold bullion added over 1.2% while the largest big-cap gold mining ETF GDX added about 4% on the same day. The latter saw more gains as it often trades as a leveraged play on gold. But both lost over 0.3% and 0.6% in extended hours. The iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) – Surprise Winner but Potential Loser Mortgage REITs perform better in a low interest rate environment. However, though high-yield REM added 3.2% yesterday, it might see a slump ahead. Original Post

Is The Time Ripe For 50% Currency Hedged ETFs?

The global currency world has been on a tumultuous ride on central banks’ comments. The basic perception has been that the currency-hedged developed market ETFs will be on a roller-coaster ride since the second half of 2015 and in 2016 on divergent economic policies between the U.S. and others. So far, the investing trend has paralleled the belief as the greenback peaked to multi-year highs on looming policy tightening and currencies like euro and yen plunged on the ongoing QE measures. However, the trend was volatile at the start of December. While the Fed repeatedly put stress on a slower rate hike trajectory once the action is taken, the European Central Bank (ECB) – widely viewed as stepping up its QE measure – fell short of expectations. The ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates (by 10 bps) was also below the expected 0.15-0.20%. Thanks to a less dovish ECB, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. The CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) was up 3.2% on December 3. Across the pond, the Fed is preparing for a rate hike this month but is expected to apply a petite and slow hike which in turn can cut some strength from the greenback. Now that the oil price is due for more pain ahead with OPEC members agreeing on pumping up more oil, global inflation will remain for a few more months. This leaves the Fed with no option other than taking the policy tightening issue easy. After all, the U.S. economy is yet to meet a key Fed agenda of 2% inflation. Plus, the greenback has advanced over 7% so far this year (as of December 7, 2015). The U.S. dollar ETF, the PowerShares DB US Dollar Bull ETF (NYSEARCA: UUP ), is now just 3.2% down from the 52-week high price, indicating less upside potential from the current level. All in all, though the greenback is likely to remain strong ahead and euro is likely to weaken, volatility is likely to crop up now and then. In the last five sessions (as of December 7, 2015), UUP lost over 1.3% while FXE gained about 2.4%. This might put the currency hedging global investing at risk. Notably, currency hedging is a beneficial technique when the USD is strengthening relative to the concerned foreign currency. But investors would incur losses on repatriating their foreign income while the USD is falling. In this backdrop, a 50% hedged ETF can be an intriguing option to minimize risks and sail through all kind of market dynamics. Below we highlight three ETFs that could be on watch in the coming days, if the U.S. dollar slips and other currencies strengthen on central bank policies and economic developments. These funds may guard your portfolio from extreme situations and will likely deliver moderate returns. IQ 50 Percent Hedged FTSE International ETF (NYSEARCA: HFXI ) The fund follows the FTSE Developed ex North America 50% Hedged to USD Index and has amassed about $41.6 million in assets after debuting in July. The fund charges 35 bps in fees. The fund added over 2.1% in the last three months (as of December 7, 2015) (see all broad developed world ETFs here). IQ 50 Percent Hedged FTSE Europe ETF (NYSEARCA: HFXE ) The $37.6-million fund tracks the FTSE Developed Europe 50% Hedged to USD Index. The fund charges 45 bps in fees and was up about 1% in the last three months (as of December 7, 2015). IQ 50 Percent Hedged FTSE Japan ETF (NYSEARCA: HFXJ ) The $26.6-million fund looks to follow the FTSE Japan 50% Hedged to USD Index. The fund charges 45 bps in fees and gained over 7% in the last three months. Original Post

2 Investing Implications Of Higher U.S. Rates

Real U.S. rates have been climbing, while rates are falling in much of the rest of the world. As Russ explains, this divergence has a number of implications for investors. sergey nivens / Shutterstoc While U.S. economic data continue to come in mixed, the numbers still point to decent U.S. economic growth . That, along with some evidence of stabilization in international markets, has pushed the odds of a December interest rate hike by the Federal Reserve (Fed) higher. As a result, real U.S. rates have been climbing. As I write in my latest weekly commentary, ” Digesting the Implications of Higher Rates,” I expect the rise in long-term rates in the U.S. will be contained , given several factors, including demographic trends and institutional demand for long-term, high-quality bonds. But the fact that U.S. rates, both long and short term, are rising while rates are falling in much of the rest of the world has a number of implications for investors. 1. The dollar will continue to strengthen, keeping pressure on precious metals. Over the past six weeks, while U.S. rates have risen, rates have declined in Germany, Italy and Japan, according to data accessible via Bloomberg. Looking forward, we will likely continue to see a divergence between U.S. and international short-term rates as central banks in these regions maintain easy money while the Fed tightens. This rate divergence helps explain the renewed strength in the U.S. dollar, which last week reached its highest level since the spring, as Bloomberg data show. The combination of a strong dollar and rising real rates is having a predictable effect on precious metals prices. The simultaneous rise in real and nominal rates reflects the fact that inflation is contained and that puts downward pressure on the price of precious metals (since they are viewed as an inflation hedge, but provide no income, they consequently become less attractive). This time is no different, with gold and silver trading back down toward their summer lows, below $1,100 per ounce for gold, according to Bloomberg data. Given this environment, I remain cautious on precious metals. Still, having a hedge against inflation in a portfolio is a sound strategy, and I prefer Treasury Inflation Protected Securities in that role. 2. A stronger dollar supports the case for hedged currency exposure in international stocks. I continue to like international developed markets , such as Europe and Japan. However, a strong dollar can erode the local gains made in international stocks. As such, given my expectation for further dollar appreciation, I believe investors should use vehicles that hedge most or all of their international currency exposure. This post originally appeared on the BlackRock Blog.