Last month, Fed Chairman Ben Bernanke unveiled the latest creation from the central bank – the infamous QE3. As details continue to emerge about the next round of quantitative easing, many investors, including a number of hot-shot analysts and experts, have been weighing in on how they believe the new stimulus measures will pan out. Some have received the Fed’s new plan with open arms, while others remain understandably skeptical if not down right opposed to QE3. And now that the eurozone, Japan and the United States have all set out their new monetary policies, the printing presses will be working overtime as these three global heavy hitters line up to pump trillions of dollars into their economies. Now investors are faced with the daunting task of trying to quantify and project the implications of these massive programs – will money printing “stimulate” the economy, or will the onslaught of currency supplies only do more harm than good? [see 101 ETF Lessons Every Advisor Should Learn].
To begin, let’s take a close look under the hood of Bernanke & Company’s latest creation. In its new “open-ended” plan, the central bank plans to buy $40 billion of mortgage debt securities each month to prop up the frail economy. Bernanke has set no end date to this program, indicating that those purchases could be potentially extended if the labor market does not improve. From a macro perspective, this would mean that if QE3 were to stretch out for a year, the Fed would pump $480 billion into the economy while that number jumps to $960 billion and $1.4 trillion if it continues for two or three years.
In his announcement of QE3, Bernanke was adamant that these unprecedented measures will not be the end-all-be-all to our nation’s economic problems. Instead he stated that “We’re not promising a cure to all these ills, but what we can do is provide some support.” And looking at the market’s initial response, it was clear that investors were seemingly satisfied with Ben’s response [see also October Edition Of ETF Edge Now Available].
But although some were “relieved” by the arrival of QE3 and welcomed the initial bullish market rally, others weren’t as eager to jump on board. Perhaps one of the biggest critiques of the Fed’s plan is that the rampant money printing will eventually lead to hefty inflation and a weak dollar. Other theories suggest that the new stimulus program will in fact prop up the economy, but when asset purchasing ceases, the economy would suffer a major blow. Whether you’re a vehement opponent of QE3 or a dedicated supporter in Bernanke’s camp, there are, of course, ways to potentially profit from the certain yet indefinite new round of quantitative easing.
Despite the skepticism surrounding QE3, many argue that the new stimulus package has the ability drive the previously shaky equities market to all-time highs. Granted, there are a number of economic variables that might offset this potential, stocks thus far have held their ground and then some since the announcement. For those who believe QE3 will bring out the bulls, a leveraged play on equities could be a potentially lucrative and rewarding position. There are currently over 130 funds in our Leveraged Equities ETFdb Category for investors to choose from, with options ranging from broad-based leveraged ETFs to a bullish sector-specific products [see the Truth About Leveraged ETFs].
ETFs For Your Inner Bear
If you are one of the investors who aren’t too thrilled about the prospects of QE3, there are a number of ETF plays that could potentially benefit if this next round of quantitative easing fails to successfully stimulate the economy:
- Active Bear ETF (HDGE): This fund is actively managed and takes short positions in various assets, as it aims to pick out securities that are poised to drop. HDGE is managed in a relatively unique way, as investors can see the entire holdings of the fund (updated daily) on the homepage for the ETF.
- U.S. Market Neutral Anti-Beta Fund (BTAL): This ETF is designed to essentially takes long positions in low beta stocks while shorting high beta stocks. The strategy delivers favorable returns when markets begin to recede since high beta stocks will be at the forefront of losses, while low beta stocks will have relatively mild losses or may even remain flat.
- DB U.S. Dollar Index Bearish (UDN): This ETF replicates the position of being short the U.S. dollar relative to a basket of developed market currencies, including the euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. If the Fed’s rampant money-printing does in fact lead to a weaker dollar, holders of UDN could see some handsome returns.
- DB US Inflation ETN (INFL): Although not necessarily a “bear” fund, this ETN is a nice pick for those who believe that QE3 will bring on inflation and want a way to protect their portfolios from a rise in prices. INFL strategy involves establishing long positions in TIPS while simultaneously shorting equivalent term U.S. Treasury bond futures contracts.
Commodity Plays Although inflation is a rather cringe-worthy phenomenon, there are a handful of investments, namely commodities, that are poised to profit from a general rise in prices. And while inflation will likely minimize or erase annual returns in a portfolio, these commodity ETFs could help you keep pace with QE3 and inflation:
- SPDR Gold Trust (GLD): This ETF is by far everyone’s favorite gold fund and is one of the best ways to outpace QE3. As the dollar continues to devalue and investors leave the greenback for rosier gardens, gold and GLD will benefit [see GLD-Free Gold Bug ETFdb Portfolio].
- Silver Trust (SLV): Another popular physically-backed precious metal fund, SLV will do well in the face of the next round of QE for mostly the same reasons as GLD. Silver is, however, more volatile than gold, meaning that the upside (or downside) potential is much higher.
- United States Oil Fund (USO): Although whether or not this ETF will profit from QE3 is highly arguable, many believe that, in addition to a stock market boost, the Fed’s stimulus plan has the ability to prop up crude oil prices.
- Market Vectors-Agribusiness ETF (MOO): This ETF tracks companies who derive at least 50% of their profits from the agricultural business. Considering how food prices are often the hardest hit by inflation, the companies included in MOO’s portfolio have the potential to boost profit.
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Disclosure: No positions at time of writing.
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