Your Federal Reserve ETF Playbook
The Federal Reserve will reveal its latest monetary policy today at 2:00 p.m. ET. Most traders are not expecting the central bank to announce an interest rate increase, but with the conclusion of this Fed meeting, the calendar inches closer to September, widely believed to be the first meeting at which Janet Yellen and company could announce a rate hike.
Those looking to trade the news surrounding Wednesday's Fed decision, or lack thereof, have some compelling options from the world of exchange traded funds. Chief among them is the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP).
Playing The Currency
UUP is the U.S. Dollar Index Tracking ETF, meaning it gives investors to a long position in the greenback against the euro, yen, Swiss franc, Swedish krona, British pound and the Canadian dollar. Given the divergent monetary policies being seen throughout the developed world with the Fed eyeing higher rates as its counterparts in other regions pare borrowing costs, UUP is this year's second-best currency ETF, as it was in 2014, with a gain of 5.6 percent.
Traders typically bid the dollar higher in advance of an official rate hike announcement from the Fed, so perhaps it is telling that $40.3 million has been pulled from UUP this month. However, on a year-to-date basis, UUP has added nearly $130 million in new assets, ranking it among the top 15 PowerShares ETFs for 2015 inflows, according to issuer data.
Stronger Dollar Play
Investors looking to make an equity bet on a stronger dollar can evaluate the newly minted WisdomTree Strong Dollar U.S. Equity Fund (NYSE: USSD), which debuted last week. The new ETF tracks the WisdomTree Strong Dollar U.S. Equity Index (WTUSSD), an index comprised of companies that garner at least 80 percent of their sales in the U.S.
USSD does feature a 14.2 percent weight to the rate-sensitive utilities sector, but strong dollar plays financial services and consumer discretionary combine for over 45 percent of the fund's weight.
At The Sector Level
Investors and traders looking to play Fed news at the sector level could find some excitement with boring utilities stocks by way of the Utilities Select Sector SPDR (NYSE: XLU). Utilities stocks and ETFs are among the most rate-sensitive groups equity investors can avail themselves of and that much has been confirmed by XLU's year-to-date loss of 9 percent. Among the nine sector SPDR ETFs, only the Energy Select Sector SPDR has been worse.
Just as UUP's July outflows signal some traders are betting the Fed holds off on a rate hike announcement, XLU's July inflows confirm the same. Investors have added $362 million to the largest utilities ETF this month as the fund has surged 3.3 percent.
Another sector play that should be front-and-center on the back of Fed news is regional banks, namely the SPDR S&P Regional Bank ETF (NYSE: KRE). KRE's holdings historically have a positive correlation to increases in 10-year Treasury and yields.
This isn't rocket science. Ten-year yields are up 36.7 percent over the past six months, a move that has helped boost KRE by 18.5 percent over the same period. Think the smart money doesn't know about KRE and its rising rates utility? The ETF has over $2.8 billion in assets under management, $870 million of which has come into the fund since the start of the second quarter.
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