Three ETFs To Watch This Week: DXJ, XLE, FXF

by on March 14, 2011 | ETFs Mentioned:

Last week domestic equities were confined to a volatile trading range. The S&P 500 and Dow Jones both slid lower by over a percentage point each, while the NASDAQ took a much larger hit and lost over two percentage points for the week. Ongoing tension in the Middle East, especially recent protests in Saudi Arabia, caused plenty of concerns for equities world-wide, with emerging market indexes broadly trending lower as well. On Friday, a devastating earthquake shook  Japan, triggering a massive tsunami and potential nuclear crisis in one of the world’s largest economies. Surprisingly enough, oil failed to make new high; the energy commodity has been falling since last Wednesday and it closed right near the $100 mark on Friday. Given all the uncertainty and volatility in the markets last week gold was rather weak despite its “safe haven” appeal, with the precious metal closing at around $1,420 an ounce for the week.

Economic data from China and Japan will be closely watched by currency and equity investors this week. While at home, traders and investors alike will focus on the U.S. Federal Open Market Committee as an interest rate decision is due on Tuesday morning.  Below, we profile three ETFs that are likely to be active in trading over the next five days [for more ETF insights, sign up for our free ETF newsletter]:

WisdomTree Japan Hedged Equity Fund (DXJ)

Why DXJ Will Be In Focus: The devastating impact of the earthquake extended over into financial markets and Japanese equities sold-off. Interestingly enough, in the currency markets the Japanese yen was quick to appreciate and trade modestly higher, on the assumption that insurers and other Japanese businesses wil begin repatriating funds in the short term. DXJ, which tracks the WisdomTree Japan Hedged Equity Index, opened nearly 5% lower on Friday, and the fund managed to fight its way back up and close above the $38 mark. The underlying index is designed to provide exposure to equity securities in Japan, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and and the Japanese yen. In essence, DXJ seeks to track the performance of equity securities in Japan that is attributable solely to stock prices without the effect of currency fluctuations.

The Bank of Japan will announce their interest rate decision when they meet on Monday at 6pm (CT). The overnight call rate in Japan has remained at 0.10% since the beginning of 2009, and given the unfortunate natural disaster that has fallen upon the country, it would be truly shocking to see the bank announce a rate increase. Industrial holdings receive the heaviest allocation within DXJ, and it will be interesting to see how the bank’s rate decision will be perceived by equity and currency traders [see DXJ Holdings]. DXJ is a great way to gain Japanese equity exposure, while also protecting against yen volatility, and trading volumes will likely see an increase as the Bank of Japan’s interest rate decision and commentary, as well as the ongoing rescue efforts, will be closely watched.

Energy Select Sector SPDR (XLE)

Why XLE Will Be In Focus: While oil was relatively quiet these past few sessions, though the commodity has jumped by more than 10% this year thanks to the ongoing political tensions in the Middle East. The latest news of Saudi police firing at protesters is further building upon the mountain of fear that is concerning investors and putting excessive pressure on energy markets already. XLE tracks the Energy Select Sector Index, which includes companies from the oil, gas & consumable fuels industry and energy equipment & services [see XLE Holdings]. XLE has gained just over 10% year to date, and the fund is up more than 28% in the last year of trading. The fund lost over 4% during last week’s trading, which demonstrates how political instability overseas is manifesting into market volatility.

Recent volatility has proven to be quite profitable for disciplined traders. However, many economists are concerned that rising oil prices will hinder economic recovery and further contribute to already growing fears of rising global inflation [see Three Country ETFs That Could Benefit From Triple-Digit Oil]. XLE will come into focus this week as the media spotlight remains fixed on the Middle East, and investors will continue to monitor the energy markets.

Rydex CurrencyShares Swiss Franc Trust (FXF)

Why FXF Will Be In Focus: The Swiss National Bank will announce its interest rate decision on Wednesday at 10:30pm (CT) with analyst expectations being for the rate to remain unchanged at 0.25%. FXF tracks the Swiss Franc by replicating the price performance of the Swiss franc relative to the U.S. dollar. The Swiss interest rate has remained at 0.25% since March of 2009, and since the last rate announcement in December FXF has gained just over 4%. While the U.S. dollar is a top-pick when investors look to flee for safety, the Swiss Franc holds the ultimate “safe haven” appeal in currency markets. FXF just recently hit an all-time high of $107.67 on March 2nd, and the fund is up 4% over the past year [see FXF Fundamentals].

Investors will pay close attention to the commentary offered by the Swiss National Bank following the interest rate decision. The Bank’s outlook regarding domestic, global, and European economic recovery will be far more important than the interest rate announcement itself. Traders and investors looking to establish positions in FXF may wish to wait until after the decision and press conference, since market sentiment is the main driver of price action.

Disclosure: No positions at time of writing.