5 ETFs To Buy Before The Fed Cuts QE

by on May 28, 2013 | ETFs Mentioned:

Last week, Wall Street focused its attention on the latest developments on the Fed front as Ben Bernanke testified before the Senate’s Joint Economic Committee in Washington. In his testimony, the chairman reported that the central bank will remain on its current course of action–the $85 billion per month bond purchasing program–though investors may see monetary policy changes in the “near” future. When asked if the Fed had a timeline or plan as to how they will unwind their massive stimulus measures, Bernanke simply replied “I don’t know.” The latest FOMC minutes also reflected the chairman’s uncertainty, stating that a number of participants favored scaling back the bond-buying program, but views differed about what evidence would be necessary to make such a drastic change [see The Cheapest ETF for Every Investment Objective]. 

And while further commentary pointed towards the Fed having some kind of plan in place but are unsure of when to exactly pull the trigger, investors should brace themselves for what could potentially be a significant shift in the current market environment. For those wondering where to park their assets before the Fed begins its taper, we highlight five ETFs that may stand to benefit:

1. S&P 500 VIX Short-Term Futures ETN (VXX, B+)bernanke

For those looking for a short-term trade, VXX will likely be your best bet. Once the Fed announces that it will start tapering its bond purchases, the initial reaction will likely put the markets through some volatile trading sessions, as investors digest how exactly the new policy change will affect them. More than likely, each subsequent FOMC meeting and commentary from Fed officials or Ben Bernanke may also trigger higher levels of volatility.

2. Floating Rate Note Fund (FLOT, B-)

While the Fed has indicated that it is considering scaling back asset purchases in the near future, the central bank has been adamant in its reluctance to prematurely tighten monetary policy. When it does, however, decide to increase its benchmark interest rate, investors may find FLOT a compelling buy, as this fund is designed to strip out interest rate risk while still capturing the component of returns associated with investment grade corporate debt risk [see Better-Than-AGG Total Bond Market ETFdb Portfolio].

3. SPDR S&P Bank ETF (KBE, A)

Since the central bank started its quantitative easing, investors have witnessed the yield curve essentially flatten out in the near-zero interest rate environment. Historically, when the yield curve steepens, financial equities–particularly banks–have performed well. As such, investors who believe this trend will reoccur may want to invest in banking ETFs. Investors should note that initially this corner of the market may see a significant correction before continuing on its upward trend.

4. CurrencyShares Euro Currency Trust (FXE, A)

While the Fed has stated concerns about the current economic environment, particularly concerning the weak labor market, the general consensus has been that the U.S. economy is on the right path for a full economic recovery. On the eurozone front, conditions aren’t as rosy with the debt-burdened region still facing significant headwinds. Because of this, investors may see the dollar strengthen relative to the euro, meaning a short position in FXE may be beneficial [see also How To Take Profits And Cut Losses When Trading ETFs].

5. United States Commodity Index Fund (USCI, B-)

When the Fed finally pulls the trigger, investors should realize that the central bank is signaling to the market its positive views on the economy. And as the economy picks up steam, demand for commodities and raw materials will also likely rise, making broad-based funds like USCI a compelling option.

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Disclosure: No positions at time of writing.