No doubt about it: the U.S. economy is weak. While the Federal Reserve considers taking steps to get us back on track, let’s consider exchange traded funds (ETFs) that may be best poised to benefit if they do.
Quantitative Easing is a monetary policy which generally involves increasing the supply of dollars in the market to promote lending and improve liquidity.
n. Gary Gordon for ETF Expert reports that there are major risks to the economy and investors when this easing takes place. [Currency ETFs And The $4.4 Trillion Market.]
- Banks have been opting to hold onto the cash, rather than lend it out to people and businesses with questionable credit. And boosting reserves is a way for banks to cover the enormous level of loan defaults from the housing crisis.
- When the Fed creates money out of “thin air,” more dollars in existence dilutes the value of the currency. Hyperinflation may result as currency weakens and foreign investment stops.
If the Fed does take extra measures, one ETF that may continue to be hit is the PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP), which has already declined 3% in the last two weeks alone. [The Dollar and Falling Euro Plays.]
Many commodities are priced in dollars, as well, meaning that if the dollar continues to weaken it could affect overseas buying activity and depress the performance of ETFs such as United States Oil Fund (NYSEArca: USO).
On the flip side, some assets and ETFs stand to benefit from any quantitative easing steps the Fed may take.
According to Gordon, if dollars are what you have in your investment accounts, and everything but the U.S. dollar is climbing in value, you should grab some of those assets while they are hot. On pullbacks, he suggests considering ETFs like these:
- SPDR Select Industrials (NYSEArca: XLI)
- PowerShares Nasdaq 100 (NYSEArca: QQQQ)
- iShares South Africa (NYSEArca: EZA)
- SPDR Short-Term International Treasury (NYSEArca: BWZ)
- PowerShares DB Base Metals (NYSEArca:DBB)
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.