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Biggest ETF Stories of This Week

Sweta Killa
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This week was an eventful one with some key developments dominating the headlines and influencing ETFs. Below we discuss some of these events.

Trump and Kim Reach Deal

The historic summit between President Donald Trump and North Korea leader Kim Jong Un in Singapore has created history, possibly ending a 68-year long bitterness. The leaders signed an agreement, which offers undisclosed American “security guarantees” in exchange for a commitment from North Korea to “work toward complete denuclearization of the Korean Peninsula.” Although this is a positive step, lack of details on the denuclearization process and talks of follow-up negotiation have disappointed Wall Street. 

Peace talks pushed down defense ETFs after the summit. iShares U.S. Aerospace & Defense ETF ITA, SPDR S&P Aerospace & Defense ETF XAR and Invesco Aerospace & Defense ETF PPA all shed at least 1% since the Trump-Kim deal. All these ETFs have a Zacks ETF Rank #1 (Strong Buy).

AT&T-Time Warner Deal Gets Green Signal

U.S. District Court Judge Richard Leon approved AT&T’s T $85.4 billion purchase of Time Warner TWX without any condition. The long-awaited decision has paved the way for a merger frenzy, which will change the landscape of the media industry. This is especially true as Comcast CMCSA has made a $65 billion or $35 per share bid to acquire the film production and studio assets of Twenty-First Century Fox FOXA (read: Comcast Outbids Disney for Fox Assets: Media ETFs Surge).

The move resulted in a bidding war with The Walt Disney Company DIS, which had struck a deal in November to acquire the same assets for $52.4 billion in an all-stock deal. This led to a surge in media ETFs - Invesco Dynamic Media ETF PBS and iShares Evolved U.S. Media and Entertainment ETF IEME. PBS has a Zacks ETF Rank #3 (Hold).

Fed Turns Hawkish

As expected, the Fed raised interest rates for the second time this year by 25 bps to 1.75-2%. This also marks the seventh rate hike since December 2015. The central bank signaled a hawkish outlook with two more lift-offs that would translate into four total increases in 2018. The decision led to a spike in yields. The two-year Treasury yields, which are most sensitive to shifting expectations of Fed policy, rose faster than that of 10-year and 30-year yields, narrowing the spread between the short-term and long-term yields. In fact, the yields curve flattened to the levels since August 2007.

Generally, a rising rate scenario is highly profitable for banks, as they seek to borrow money at short-term rates and lend at long-term rates, thereby expanding net margins and bolstering banks’ profits. But, this is not the case now as short-term rates are creeping higher and long-term rates are moving up slowly leading to a decline in net margins. As a result, the ultra-popular bank ETF - SPDR S&P Regional Banking ETF KRE is down nearly 1% post Fed meeting. It has a Zacks ETF Rank #1 (read: Fed Turns Hawkish: ETF Areas to Win).
 
ECB to Exit QE, Maintained Dovish View

The European Central Bank (ECB), currently buying €30 billion in monthly asset program, plans to reduce its asset purchases to €15 billion from October to December and then finally end the massive program. Additionally, the bank pledged to keep interest rates at record lows at least through the summer of 2019 pointing to a dovish outlook. The move led to strong gains for European shares, which is poised for the best week in more than three months, while euro fell sharply.

A decline in euro will actually benefit exporters and the manufacturing industry, resulting in soaring stock prices. As a result, currency hedged ETFs, which seek to tap the bullish international fundamentals by dodging the effects of a decline in weak euro, seem an attractive option. WisdomTree Europe Hedged Equity Fund HEDJ is a popular fund tracking European equities while at the same time protecting against wakening euro. The fund has a Zacks ETF Rank #3 (read: Currency Hedged ETF Hits New 52-Week High).

World Cup Fever Leads to Buying Frenzy

The 2018 FIFA World Cup has started in Russia with expectations of solid growth across zones, especially in industrial spaces such as media, advertising, restaurants, hotels and airlines. Pro Sports Sponsors ETF FANZ, Global X Social Media ETF SOCL and VanEck Vectors Gaming ETF BJK could offer immense upside potential from the month-long event. SOCL and BJK have a Zacks ETF Rank #3 (read: 6 ETFs to Score High from World Cup Spending Spree).

Trump Prepares for Chinese Tariff

Trump has approved the plan to impose significant import tariffs on Chinese goods and is expected to announce today the first round of list for goods targeted for tariff. The move, if enacted, could lead to retaliation from China. Beijing earlier revealed a list of $50 billion in U.S. products that would face retaliatory tariffs, including beef and soybeans. As a result, Invesco Dynamic Food & Beverage ETF PBJ and First Trust Nasdaq Food & Beverage ETF FTXG are on investors’ radar and could take a hit from US-China trade disputes. PBJ has a Zacks ETF Rank #3 while FTXG has a Zacks ETF Rank #5 (Strong Sell).