Quantitative Easing Propels ETF Explosion

by JT on September 16, 2012

explosionInvestors interpreted Bernanke’s plan to buy $40 billion of mortgage-backed securities per month as a call to “buy everything.” This much is clear from last week’s best performing exchange-traded funds.

Top 5 ETFs Last Week

    1. VelocityShares 3X Long Natural Gas ETN (UGAZ) 31.3% – Natural gas was this week’s winner. Natural gas logged several up days in a row, which was multiplied by the daily compounding mechanism in a triple long ETN. Inventories were the primary driver. Colder weather combined with temporary production cuts in the Gulf of Mexico slowed inventory growth. Natural gas supplies are 11% above the 5-year average, well off a March supply glut 60% higher than average.
    2. Daily Russia Bull 3x Shares (RUSL) 22.4% – Risk-on trading after the Fed’s monthly meeting was especially good to risky markets like Russia. A major commodity producer, Russia benefits from higher prices for oil and an appetite for risk. The daily bull fund from Direxion rallied more than 11% on Thursday once word broke of the Fed’s plan to expand quantitative easing and continue operation twist.
    3. Global X Junior Miners ETF (JUNR) 21.2% – Junior miners had a great week, helped by a rally in metal prices. Unlike more established, bigger players, junior mining stocks usually operate only a handful of mines with high cost production. As a group, junior mining companies enjoy greater operating leverage, meaning a small change in gold prices can significantly increase earnings power. Holding only 28 stocks, this undiversified ETF is a great proxy for a levered gold trade.
    4. Small Cap Aggressive Growth (SGGG) 21.1% – This broadly diversified ETF holds 228 different stocks in the small cap space. A product by Russell, this fund selects positions quantitatively, hoping to discover high growth stocks selling with small capitalization values. Like many funds on the list, this fund is decidedly a risk proxy for traders who want access to the most volatile corner of the stock market. Microcaps make up 31% of fund holdings.
    5. Daily Gold Miners Bull 3x Shares (NUGT) 20.5% – Gold miners put up strong performance this week on gold’s 2% move on Thursday. The fund holds a worldwide mix of gold mining stocks, giving it exposure to an influx of capital in international markets, especially emerging markets. Triple leverage combined with the natural leverage in gold producers makes this ETF a fast mover with any rise or fall in gold prices.  Personally, I still feel gold is not a good investment (see these 5 Reasons to Avoid Gold ETFs), and leveraged ETFs experience value decay as well, but hey, if momentum is your thing, it’s tough to fight the Fed.

What’s Hot: Risk, Anything but the Dollar

Last week’s trading makes one thing very clear: risk is much more attractive to investors than negative returns. Investors piled into foreign stocks in highly-speculative parts of the world, specifically Russia and India. Likewise, investors dumped the dollar to position themselves in gold and silver miners, a favorite among those concerned with inflation.

Elsewhere (Real Estate Investment Trusts) REITs put up impressive weekly returns as the Federal Reserve’s buying will push up asset values for mortgage-backed securities, which mortgage REITs hold exclusively. High-yield debt in both the US and international bond ETFs also got a boost after yield-seeking investors moved longer on the yield curve and into riskier debt securities to achieve better returns on their investment capital.

It will be interesting to see if the “buy everything” mindset lasts for another week on Wall Street. As Bernanke’s bond buying will be consistent for as long as three more years, the full extent of an active central bank probably isn’t entirely priced into the market just two trading days after the announcement.

Disclosure: The author has no positions in any of the ETFs mentioned here.

{ 1 comment… read it below or add one }

Ken Faulkenberry - AAAMP Blog September 18, 2012 at 2:18 pm

Pretty amazing gains in such a short period of time. I wonder how long before withdrawals begin after the big “fix”? Thanks for the good information.


Leave a Comment

Previous post:

Next post: