Federal Reserve Chairwoman Janet Yellen will give her much-anticipated Jackson Hole speech on Friday 10 a.m. Eastern, and depending on how dovish she seems, exchange traded funds on some of this year’s most popular plays may either continue to push higher or find an abrupt ceiling.
Yellen has maintained a dovish stance throughout the year, and most observers anticipate the Fed chief will likely raise rates at least one time this year, maybe in December. Looking at the fed fund futures market, options traders place a roughly 50-to-50 percent change of a 25 basis point hike at the December meeting.
If we continue to stay the course, the markets may enjoy a nice rebound in assets like gold and Treasuries, which have lost their way ahead of Yellen’s speech.
For instance, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) have declined about 1.6% over the past week, with Comex gold futures now trading at $1,325.5 per ounce.
Meanwhile, long-term Treasury bond ETFs have been stuck without direction after falling off from their highs in early July. Over the past week, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) was up 0.3%, PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) was flat and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) was 0.4% higher.
Alternatively, more aggressive traders may capitalize on a potential rally in these assets through leveraged ETF products, such as the DB Gold Double Long ETN (NYSEArca: DGP), which takes the double or 200% exposure of gold price movements, ProShares Ultra Gold ETF (NYSEArca: UGL), which also takes the 2x of gold prices, and VelocityShares 3x Long Gold ETN (NYSEArca: UGLD), which offers a larger 3x or 300% exposure to price movements.
For long Treasuries exposure, the ProShares Ultra 20+ Year Treasury (NYSEArca: UBT) takes the 2x or 200% daily performance of long-term Treasuries and Direxion Daily 20+ Year Treasury Bull 3x Shares ETF (NYSEArca: TMF) follows the 3x or 300% performance of long-term Treasuries.[related_stories]
However, the biggest concern many market participants are sweating over is a potentially more hawkish-than-expected stance Yellen might take in Jackson Hole, Wyoming. If Yellen suggests a quickening interest rate normalization time table, the U.S. dollar would strengthen, which would weigh on commodities like gold, and push up yields Treasuries or weigh on bond prices.
Consequently, investors may look at PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Gold would be less attractive in a rising rate environment as the hard asset does not offer a yield and it will be pressured by a rising dollar. Traders may consider short or inverse gold ETF options to hedge against a potential turn.
For instance, the ProShares UltraShort Gold (NYSEArca: GLL) provides a two times inverse or -200% daily performance of gold bullion. Alternatively, ETN options include the DB Gold Double Short ETN (NYSEArca: DZZ), which tries to generate the twice inverse or -200% return of the daily performance of gold; DB Gold Short ETN (NYSEArca: DGZ), which tries to reflect the inverse of gold price movements; and VelocityShares 3x Inverse Gold ETN (NYSEArca: DGLD), which tries to reflect the performance of three times the inverse or -300% daily performance.
Additionally, investors can look to hedge bets against gold miners with bearish options like the Direxion Daily Gold Miners Bear 3X Shares (NYSEArca: DUST), the Direxion Daily Junior Gold Miners Index Bear 3X Shares (NYSEArca: JDST), ProShares UltraShort Gold Miners (NYSEArca: GDXS) and ProShares UltraShort Junior Miners (NYSEArca: GDJS). The Direxion options take the -300% exposure to large miners and junior miners, respectively, while the ProShares options take the -200% exposure to large miners and junior miners, respectively.
Lastly, to hedge against falling Treasury bond prices, the ProShares Ultra 20+ Year Treasury (NYSEArca: UBT) takes the 2x or 200% daily performance of long-term Treasuries and the Direxion Daily 20+ Year Treasury Bull 3x Shares ETF (NYSEArca: TMF) follows the 3x or 300% performance of long-term Treasuries.
While these types of leveraged and inverse ETFs may help traders capitalize on short-term moves, investors should be aware of the risks of investing in these geared products over the long haul and during periods of heightened volatility.
Full disclosure: Tom Lydon’s clients own shares of GLD, GDX.
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.