Market Overview

ETFs For QE3: More Than Just GLD


Comments by San Francisco Federal Reserve Bank President John Williams today serve as a reminder that another round of quantitative easing remains at the Fed's disposal should the U.S. economy start to falter. Williams appears to be a fan of buying mortgage-backed securities, but how many fans will QE3 have?

Arguably, QE3 is about as good of an idea as Godfather III, maybe worse. Fixed income experts have argued more asset purchases by the Fed could spell the end of the bull market for bonds. In 2010, Pimco's Bill Gross said "Check writing [QE2] in the trillions is not a bondholder's friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme."

Simply put, another round of QE is likely to be viewed as controversial and that's probably putting things mildly. Of course, another QE package will be good news for select ETFs and that means more than just gold funds such as the SPDR Gold Shares (NYSE: GLD) and the iShares Gold Trust (NYSE: IAU).

If QE3 does arrive, the following ETFs could very well thrive.

Market Vectors Mortgage REIT Income ETF (NYSE: MORT) In theory, the Market Vector Mortgage REIT Income ETF should at least have potential assuming the Fed ups its purchases of mortgage-backed securities. However, a very real problem for MORT exists in the form of some of its constituents' dividends being viewed as vulnerable. American Capital (Nasdaq: AGNC) announced a divided cut earlier this week, but some analysts have defended the stock.

That stock represents almost 14.6% of MORT's weight and Annaly Capital (NYSE: NLY) accounts for another 20%. If Fed action helps stocks like Annaly and American Capital, then MORT benefits. It's that simple.

ETFS Physical Palladium Shares (NYSE: PALL) As we noted earlier, there are more winners under a QE3 scenario than just gold and some can be find with gold's cheaper but still precious alternatives. Past performance is no guarantee of future returns, but QE2 was announced in late August 2010. Around that time PALL was in the $52-$53 range. The ETF finished 2010 flirting with $75 and much of that gain can be attributed to QE2.

FactorShares 2X: S&P500 Bull/USD Bear (NYSE: FSU) Just a couple weeks shy of its first birthday, the FactorShares 2X: S&P500 Bull/USD Bear is one of the most unique leveraged ETFs out there. It's best to let the issuer tell you what the fund does. "FSU seeks to track approximately +200% of the daily return of the S&P 500 Non-U.S. Dollar Index (before fees and expenses) by primarily establishing a leveraged long position in the E-mini S&P 500 Stock Price Index Futures and a leveraged short position in the U.S. Dollar Index Futures," according to the FactorShares Web site.

Translation: FSU offers a straight forward approach to more QE: Long stocks, short the greenback. Just don't make a habit of this leveraged fund as it has an expense ratio of 0.75%.

Materials Select Sector SPDR (NYSE: XLB) Since QE has a way of stoking risk appetite, an equities-based materials play makes sense as an addition to this list. With XLB, we're applying the same logic as we did with PALL. In August 2010, XLB was trading in the $32-$33 area. By the end of the year, the ETF was over $38. Even with no QE3, XLB might be worth a look here. The ETF is up over 12% year-to-date and recently cleared some stiff resistance. The ETF could have upside to the $40-$42 area.

Posted-In: Long Ideas News Sector ETFs Bonds Broad U.S. Equity ETFs Short Ideas Specialty ETFs Rumors Best of Benzinga


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