4 ETFs to Watch When the Fed Speaks

TheStreet.com

NEW YORK (TheStreet) -- It's no secret that the bull market over the last several years has been fueled by the loose monetary policies and aggressive quantitative easing of the Federal Reserve. Investors around the globe closely monitor every word of Fed Chairman Ben Bernanke's speeches in order to divine the next big opportunity in their investment portfolios. Often his remarks have an immediate and profound effect on major markets, which is why it is important to pay close attention to key segments of the economic landscape.

From my own experience watching the markets and trading for my clients' portfolios, I have often seen big moves made in a very short time, based on even the hint of a policy shift from the Fed. These swift swings can be either positive or negative for your portfolio, depending on your asset allocation and response to change.

By monitoring these four ETFs you can get ahead of the curve and potentially avoid any long-term pitfalls on the road to prosperity.

Stocks

The first ETF to which I always pay attention whenever there is breaking news is the SPDR S&P 500 . This well-known bellwether tracks the 500 largest domestically traded public companies and, as one of the most widely held and actively traded ETFs in the world, it is an excellent barometer for the health of the stock market.


Hedge funds, banks, professional money managers and everyday investors trade hundreds of millions of shares of SPY and volume explodes whenever there is a major global news event.

It pays to have SPY on your watch list and monitor it regularly for big volume swings or price moves. This often can precede a broader change in the direction of the market and may signal that you should adjust your portfolio accordingly.

Bonds

My favorite ETF for monitoring the bond market is the iShares Barclays 20+ Year Treasury Bond Fund . This fund is made up of long-duration U.S. Treasury bonds and often times makes very volatile moves when the Federal Reserve signals a change in its interest-rate agenda.

Bonds furthest from their maturity date are typically most susceptible to changes, which is why this ETF can move so rapidly. Think of TLT like the tip of a dog's tail, the point that is going to move the farthest whenever he wags it.

If the Federal Reserve signals that it is going to keep interest rates low, then you can expect that TLT will continue to rise or remain steady. Eventually, though, rising rates will return, putting downward pressure on long bonds.

If you are concerned about the prospect of rising interest rates, you can consider moving to the shorter end of the yield curve by purchasing the iShares Barclays 1-3 Year Treasury Bond Fund . This ETF has a much lower average duration than TLT, and a lower yield as well.


Alternatively you can also look at purchasing a rising-rate fund, such as the ProShares Short 20+ Year Treasury Bond Fund, to hedge your fixed-income exposure.

Precious Metals

Another segment of the economy that is often affected by Federal Reserve commentary is the precious metals sector. The SPDR Gold Shares tracks the spot price of gold bullion and can often see large asset flows based on global sentiment. Typically investors flock to gold during times of economic uncertainty as a type of safe-haven play, similar to Treasury bonds. Gold is also known as an inflationary and currency hedge because of its physical asset qualities.

This fund has recently undergone a great deal of price compression due in large part to investors shunning precious metals in favor of risk assets, such as stocks. Still, if we see a return of rising interest rates or a decline in stock prices, I would not be surprised to see a reversal in the recent gold trend that would initiate a new bull market in the yellow metal.

Currencies

The last recommendation I have for your Fed watch list is the PowerShares US Dollar Bullish Fund . This ETF tracks the daily price movement of the U.S. dollar index, which pegs the value of the U.S. dollar against a basket of other foreign currencies.

Most notably, we have seen a rise this year in UUP as the CurrencyShares Euro Trust and the CurrencyShares Japanese Yen have fallen in value.

However, these price trends are subject to change based on the long-term repercussions of quantitative easing and the reactions of foreign governments' fiscal policies. UUP is definitely an index that you want to watch as it relates to the international investments in your portfolio.

The Final Word

It will be interesting to see what the next phase of the market will bring and how these ETFs will be affected by the latest comments from Fed Chairman Bernanke. One thing is clear: The investment landscape is constantly evolving, and by staying on top of these trends you can make insightful portfolio decisions that will enhance your returns.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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