Will these ETFs soar under QE3?
The stage may be set for a broader rally into the end of 2012.
The Federal Reserve has finally given investors what they have craved for so long. On Thursday, the central bank announced it will purchase $40 billion worth of mortgage-backed securities to keep rates on home loans low. The Fed also said it will keep interest rates "exceptionally low" through the middle of 2015, extending that time line from late 2014 in previous statements.
Equities and other riskier assets surged on the news, with the Standard & Poor's 500 Index ($INX) and the Dow Jones industrials ($INDU) each gaining around 1.6%. The Nasdaq Composite Index ($COMPX) added 1.3%. Those performances along with rallies in gold, oil and other commodities could indicate the stage is set for a broader rally into the end of 2012.
Plenty of stocks and ETFs stand to benefit from such a scenario, but these ETFs have the potential to be true standouts thanks to the latest round of quantitative easing. Only non-leveraged funds were considered for this list.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
One day is not representative of a trend, but it is worth noting that XOP was meandering around before the Fed announcement Thursday. Meandering turned into an explosion that saw the ETF trade above $58 for the first time since April. XOP did not close there, but it did finish higher by 2.2% on strong volume.
What is encouraging about XOP as a QE3 play is not just its status as a high-beta energy ETF. Investors would do well to remember XOP gained almost 34% in the five months following the official announcement of QE2 in early November 2010. XOP's 52-week high of just under $62 appears to be a possible near-term destination.
iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM)
The iShares FTSE NAREIT Mortgage Plus Capped Index Fund has printed a series of new 52-week highs this week and the Fed announcement helped keep the streak intact. With interest rates set to remain low for a longer period of time than previously expected, REM's 30-day SEC yield of 12.4% becomes all the more alluring.
There is more good news for long-term investors. REM's constituents profit from the spread on short-term and medium-term interest rates, meaning interest rate hikes are would be a blow to this ETF's fortunes. Assuming that late 2014 meant December and that the middle of 2015 means June in Fed speak, the central bank has just given long-term investors at least two more quarters in which to generate income from REM.
SPDR KBW Bank ETF (KBE)
The SPDR KBW Bank ETF is now residing less than 40 cents from its 52-week thanks to the QE3 announcement. Financial services names benefited mightily from QE2, leaving investors to hope the cycle repeats. That would be a good thing with KBE, which shot up almost 14% in the five months after QE2 was announced.
There is a risk that the market will start to treat KBE as overbought. A gain of about 20% since June could mean there is a ceiling on the ETF's near-term gains. Then again, securities can stay overbought for lengthy periods of time.
Market Vectors Steel ETF (SLX)
SLX can be added to the list of ETFs with staggering performances that are not generating many headlines. Since the start of September, SLX has gained almost 20%.
A cyclical ETF in the truest sense of the phrase, SLX is one example of an ETF that wins when investors think the economy is doing better. Arguably, that is one intent of quantitative easing: To assuage concerns about the strength of the economy.
SLX needs to make on more small push to reclaim its 200-day moving average, which happens to run into the $48 area. That could be the next buy point for those that have missed this month's rally in the ETF.
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