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Fed Holds Lift-Off: Profit from 5 ETFs Pronto

Sweta Killa

Yet again last week, the Fed kept its monetary policy unchanged at ultra-low interest rates. This is primarily thanks to a weak global economy, low inflation and instability in financial markets.


The central bank highlighted that while the U.S. economy continues to expand at a moderate pace, inflation remained muted. The recent global economic and financial developments might restrain economic activity and put further downward pressure on inflation in the near term. While the Fed’s “no rates hike” decision sparked off another round of selling in the broad financial market on Friday, there are several areas, which are seeing huge investor interest and should continue to gain in the weeks ahead.


In fact, investors are flocking leveraged ETFs in order to take advantage of quick turns in a very short-period of time. This is because these products try to magnify the returns of the underlying index with the leverage factor of 2x or 3x on a daily basis by employing various investment strategies such as swaps, futures contracts and other derivative instruments (read: 10 Most Heavily Traded Leveraged ETFs YTD).


Utilities - ProShares Ultra Utilities ETF (UPW)


The rising rate concern has been playing foul on the utility sector since the start of the year. Being defensive, the utility stocks pay outsized yields but when interest rates rise, these become less attractive dulling the appeal of utilities across the board. Now, as the Fed holds interest rates at lower levels, the sector is outperforming with most of the stocks seeing smooth trading.


To tap this trend, investors currently have one leveraged ETF – UPW – which seeks to deliver twice (2x or 200%) the return of the daily performance of the Dow Jones U.S. Utilities Index. It has $21.4 million in AUM and average trading volume of nearly 6,000 shares per day. The product gained 3.2% over the past three days. Expense ratio came in at 0.95%.


Mortgage REITs - ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL)


Mortgage REITs have shown an impressive rebound post Fed meeting as they perform well in a lower rate environment. This is because short-term rates would fall faster than the long-term rates thereby leading to a wide spread and higher profits for mREIT companies. In this space too, there is one option available for investors seeking to make outsized profits in a short span.


MORL seeks to track twice the monthly performance of the Market Vectors Global Mortgage REITs Index. It has amassed $319.4 million in its asset base while trades in solid average daily volume of about 313,000 share. MORL charges 40 bps in annual fees and was up nearly 5.5% over the past few days on the no-rate hike announcement (read: ETF Winners & Losers Post Dovish Fed Meet).


Gold Mining - Daily Gold Miners Bull 3x Shares (NUGT)


Gold is expected to benefit the most from any delay in the U.S. rate hike. This is because lower interest rates would compel investors to look for a store of wealth, regaining the allure of gold. Acting as a leveraged play on underlying metal prices, gold miners tend to experience more gains than their bullion cousins in a rising metal market. While there are a few leveraged options in the gold mining space, NUGT could be an intriguing pick.


This product seeks to deliver thrice (3x or 300%) the daily performance of the NYSE Arca Gold Miners Index, which consists of firms that operate globally in both developed and emerging markets, and are involved primarily in the exploration and production of gold. It is rich in AUM of $712.5 million and trades in heavy volume of 28.5 million shares a day on average. Expense ratio comes in at 0.95%. The fund added nearly 2.6% in the past three days.


Dividends - ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (SMHD)


The love for dividend products returned to the markets as the Fed kept interest rates hike on hold. In additional, volatility in the stock market and global uncertainty rekindled interest in these products as they offer safety in the form of payouts while at the same time provide stability in the form of mature companies that are less volatile to the large swings in the stock prices (read: 5 Overlooked Dividend ETFs Worth Buying Now).


Here too, investors have little option but SMHD might emerge as a continued winner. The ETN seeks to deliver twice the monthly return of the Solactive US Small Cap High Dividend Index, which measures the performance of the 100 high dividend yielding small cap U.S. firms. The product attracted $17.4 million in AUM since its inception in February while trades in a paltry volume of 19,000 shares a day on average. The ETN charges 87 bps in annual fees from investors and surged over 2% in the last three days.


Emerging Markets – Direxion Daily Emerging Markets Bull 3X Shares (EDC)


Emerging markets have been the most hated corner of the investing universe and the stocks suffered large capital outflows in anticipation of the interest rates rise. The Fed’s no rate hike decision has given a fresh lease life to these stocks, compelling investors to make quick profits from this trend reversal through leveraged ETFs. In this regard, EDC might be a compelling choice (read: Can Emerging Market ETFs Defy U.S. Rates Hike?).


The fund tracks three times daily performance of the MSCI Emerging Markets Index, which has China, South Korea and Taiwan as the top three countries with double-digit exposure each. The product has AUM of $184.2 million and trades in a solid volume of nearly 1.8 million shares a day on average. Expense ratio came in at 0.95%. Though EDC has shed about 6.8% in its value post Fed meeting amid global growth concerns, it is expected to show some rebound in the coming weeks on the no hike decision.

 










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PRO-ULT UTIL (UPW): ETF Research Reports
 
E-TRC MP 2XLM (MORL): ETF Research Reports
 
DIR-D GM BL 3X (NUGT): ETF Research Reports
 
E-TRC MP 2XL SC (SMHD): ETF Research Reports
 
DIR-EM BULL3X (EDC): ETF Research Reports
 
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