3 ETFs to Watch Following Shocking US Credit Downgrade

by ETF Base on August 7, 2011

Unless you happen to be coming back from a weekend in the wilderness, Friday night S&P downgraded the US credit rating one notch (see list of AAA Countries remaining).  Obviously, markets will be quite volatile this week following this momentous news.  Over the weekend, the Saudi stock market had opened over 5% down.  As of Sunday evening US time, Asian markets were down less severely and US futures were off about 2%.  As would be expected, Treasuries were down, gold and silver were up, and the news cycle has been covering this non-stop.  That means not only will traders be digesting this news, but retail investors and employees with 401(k) plans will be reacting one day behind like usual, so there very well may be some carry-through past Monday.  Here are some key ETFs to watch given the uncertainty in Europe, what a ratings downgrade means to Treasuries, money markets, muni bonds and what historically used to be considered safe investments.

VXX -As outlined in my Thursday Market Crash Awesomeness where I actually made money when markets were down 4%, I bought volatility via the VXX ETF.  VXX rose 20%.  I expect it to spike further on Monday.  VXX could breach its prior highs during the financial crisis, giving it a further 100% rise from current levels.  Basically, as “fear” takes over and investors are buying puts over calls, this index spikes and it’s a nice way to go Long on something without having to resort to misunderstood inverse and leveraged ETFs.

GLD -This is the most popular physical gold ETF (well, not popular amongst the conspiracy theorists that don’t believe the custodian actually holds any gold) and moves in lock-step with the spot bullion price.  Even though silver has been much more volatile over time, it is also much more speculative and prone to “unnatural” price movements like when the CME keeps altering margin requirements to reign in speculation.  The one thing to keep an eye on in buying GLD is the gold tax rate which might give one pause depending on your personal tax situation.

SPY – Of the various major indices, I’d keep my eye on the S&P500 especially.  See, the Nasdaq ETF QQQ has a higher Beta and would normally be considered “higher risk”, but the S&P500 is more heavily weighted with financials and consumer products companies which are more apt to be affected by a major credit freeze like what we saw in 2008.  The tech sector has very much repaired its balance sheets and companies are sitting on hoards of cash.  Conversely, Financials, Builders and Consumer Products companies will be slammed by another recession.  Is Tech the new Value Investment?  Perhaps.  We’ll know soon.

Disclosure: Author is LONG GLD, VXX and short SPY via put spreads.

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