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Fed Encourages High Income ETFs, Discourages Stock ETFs

31 August 2012 at 11:22 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Chairman Bernanke hinted than the¬†U.S.¬†Federal Reserve¬†is still leaning towards additional easing, either through bond purchases or an extension¬†of low rates into 2015. (Tell us something that we didn’t already know.)

Yet the Fed does not appear poised to act in September or October. Indeed, with the Fed unlikely to provide clarity until after the presidential election, Stock ETFs may see volatile back-and-forth movement in the weeks ahead.

In contrast, High Income ETFs are having the time of their lives. Virtually every asset with impressive yield spreads over comparable treasury bonds hit a new 52-week high on Friday, August 31, 2012.

List Of Prominent High Income ETFs That Hit New 52-Week Highs on 8/31/12
             
            August %
             
ETRACS Business Development Company Index Note (BDCS) 4.8%
iShares FTSE NAREIT Mortgage REITS (REM)   2.1%
iShares S&P Preferred (PFF)       1.4%
SPDR Barclays High Yield Bond (JNK)     1.3%
iShares iBoxx High Yield Corporate (HYG)     1.1%
iShares JPM Emerging Market Bond (EMB)     0.8%
Guggenheim Bulletshares 2014 High Yield (BSJE)   0.7%

 

So what would it take for Stock ETFs to celebrate as resoundingly as High Income ETFs? What would prompt the Fed to declare that it will take decisive action? The August jobs numbers would need to be decidedly weak when they are released on 9/7/2012.

At the moment, analysts project¬†120,000 new jobs (not adjusted for those leaving or joining the labor market a la the labor participation rate). If there’s a¬†”big miss,” I expect Stock ETFs to scream, shout and twist for Bernanke’s crew to¬†produce. And the markets would¬†probably get what they want by the Fed’s mid-September meeting.

However, if headline unemployment stays at 8.3% and roughly 100,000 jobs or more come to fruition, expect the Fed to remain on hold until after the November presidential election. In this instance, Stock ETFs might react negatively. Perhaps ironically, the weaker the short-term economic data, the better Stock ETFs should perform.

High Income ETFs? They may be in the sweet spot for quite some time. Regardless if they are “champagne bubbly,” investors can’t resist the yields. And they won’t have to fret capital depreciation until and unless treasury bond ETFs enter a downtrend. With the Fed eventually buying more, then, there’s still room for helium in that treasury bond balloon.

TLT 6 Months

You can listen to the ETF Expert Radio Show ‚ÄúLIVE‚ÄĚ, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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