After months of speculation, the Federal Reserve has finally
begun to taper its QE bond buying program. In the latest FOMC
meeting, Ben Bernanke and company highlighted the slowly improving
economy, and the lowered unemployment levels, as chief reasons for
their decision to begin the bond taper.
On a monthly basis, the Fed will now buy $75 billion in monthly
assets, down from the current rate of $85 billion a month. The $10
billion reduction will come equally out of MBS purchases and
longer-term Treasury bonds, putting MBS purchases at $35 billion a
month, and Treasury bonds at $40 billion (see
Long Term Treasury Bond ETF Investing 101
Bernanke also reiterated that the scaling back of asset purchases
wasn't on a preset course, and that future decisions on asset
purchases would be made based on coming data releases. Furthermore,
the Committee reaffirmed its view that a 'highly accommodative
will remain appropriate for a considerable time after the asset
purchase program ends and the economic recovery strengthens.'
In other words, low rates seem here to stay for a while, even if
the Fed tapers all of the QE bond purchases in 2014.
Initially, stocks plummeted on the news, though key benchmarks
quickly recovered, and were trading modestly in the green after a
few minutes. Commodities also saw a bit of strength on the day-gold
and oil were both up about 0.5%-- while the Ten Year bond saw its
rates rise to 2.90%, though they hit as high as 2.93% at one point
in the session.
Meanwhile, in the ETF world, several funds stole the show and saw
huge moves following the tapering announcement. Below, we
profile three such types of funds which really experienced big
moves on the day, and could be impacted if there are more
QE-related releases in future meetings:
Thanks to such a small move higher in the government bond market
and hopes that the Fed will keep benchmark rates low for quite some
time, homebuilder ETFs were among the biggest winners on the day.
In particular, the
SPDR S&P Homebuilders ETF (
iShares US Home Construction ETF (
were in focus (also read
Taper Concerns Put Focus on Homebuilder ETFs
Both funds were well in the green, and added far more than the
overall market. XHB was up almost 2.8% on the news, while ITB added
over 3.6%. Arguably, ITB was up more than XHB because it focuses
more on the builders as opposed to the broad industry like
XHB-which includes holdings in home furnishing companies-but both
were clearly beneficiaries from the low rate outlook.
Gold Mining ETFs
Hopes for an extension of easy money policies-even if the taper
continues at a solid pace-were very helpful to the beaten-down
precious metal market. While ETFs like
were up about half a percent on elevated volume, the gold mining
space, which generally trades as a leveraged play on gold, was the
real winner (also see
High Dividend ETFs to Buy Even If the Fed
In this market, the
Market Vectors Gold Mining ETF (
jumped by 1.4%, while the
Market Vectors Junior Gold Miners ETF (
soared more than 2.8% on the news. So, assuming easy money policies
stay and a slow tapering process is the path ahead, gold miners may
be able to bounce off of their previous lows.
Easily one of the biggest losers in the ETF world was in the
volatility space. With the taper finally starting, one of the major
uncertainties hanging over the market was eliminated, causing
investors to sell off the 'fear index'.
In particular, the
iPath S&P 500 VIX Short Term Futures ETN (
was a huge loser, sliding by more than 5.5% on the session. This
move came on elevated volume too, as more than 27 million shares
had moved hands by 2:45 eastern time, well above the 17 million
usually daily average (see
Why I Hate Volatility ETFs (And Why You Should
With one area of concern finally in the books, many investors
bought stocks thanks to the solid growth outlook for 2014, and the
improving economic fundamentals. And with rates expected to stay
low for quite some time even if the taper is completed next year,
several key segments are looking relatively strong even if rates
edge up a little bit.
However, since the pace of Fed tapering isn't on a preset course,
it will be important to monitor future meetings and to see what the
FOMC does next. Any deviation from the new taper path, or
commentary about future rate increases, could definitely impact any
of the above ETFs.
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MKT VEC-GOLD MI (GDX): ETF Research Reports
SPDR-GOLD TRUST (GLD): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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