Some of the key ETFs we see having longer-term pricing issues after QE2 are some of the main go-to ETFs for traders, but some of our ETFs are inverse and leveraged as well due to the volatility that is sought by traders.  Some of the ETF and ETN products were are tracking are Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ); SPDR Gold Trust (NYSE: GLD) and the PowerShares DB Gold Double Long ETN (NYSE: DGP); CurrencyShares Swiss Franc Trust (NYSE: FXF), WisdomTree Dreyfus Chinese Yuan (NYSE: CYB), and PowerShares DB US Dollar Index Bullish (NYSE: UUP); then there is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) and the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

Financial Stock ETF Winners, Hopefully… and Maybe Housing

Banks and financials have been under pressure due to mortgage put-back fears on mortgage fraud and foreclosure woes.  If any sector could be helped by QE2 and lower rates, it would be banks and financial stocks.  Despite that they are earning very low interest, they also have to pay almost no interest as well.  The triple-leverage funds from Direxion are perhaps the most liquid and most volatile of all in the sector.  There is the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) that move at triple the intraday moves of the Russell 1000 Financial Services Index.  The bullish shares trade close to 35 million shares a day and the bearish shares trade close to 45 million shares a day.  There is deemed a greater risk of tracking error on these due to the volatility, futures contracts, and more, but these are very volatile and very actively traded ETF products.

SPDR S&P Homebuilders (NYSE: XHB) stands to win if housing wins from QE2.  If the foreclosures can be cleared out and if the borrowing rates will stay down at historic lows, then perhaps more consumers will be able to afford houses in 2011 and 2012.  Whether they buy used homes and foreclosed homes is one thing, but many still want that new home that is all theirs and comes with no baggage.  This ETF is full of homebuilding stocks and is meant to track the S&P Homebuilders Select Industry Index, which represents the homebuilding sector inside the larger S&P TMI.

QE2… A Bet Against Currencies or the Dollar

It seems that many developed nations are trying to devalue their currency simultaneously even if the dollar is not in favor.  The only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc, and the Swiss Franc can be traded via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

Another exception is potentially the Chinese Yuan depending upon how the newly elected Congress decides what tone they will use against China.  Almost all investors agree that if China were to de-peg then the Chinese Yuan would rise appreciably against the US Dollar.  China’s reserves are higher and its economic fundamentals are among the best globally.  The two direct beneficiary ETF/ETN products here that will win if China is forced to de-peg the Yuan from the Dollar are WisdomTree Dreyfus Chinese Yuan (NYSE: CYB).

If you think that US Dollar’s decline will not go on and on endlessly, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  This ETN tracks the Deutsche Bank Long US Dollar Futures index, which is comprised of long futures contracts rather than being comprised of raw currencies.  This is against a basket of currencies, and it is less volatile than many other direct single currency.

The FOMC can no longer lower rates on the short-end.  The other side of the coin is that it can promise to keep rates low indefinitely.  Quantitative easing is accomplished by Uncle Sam expanding its balance sheet by buying up debt on the long-end of the yield curve and keeping rates at near-zero on the short-end.  The new verdict seems to be a few hundred billion rather than $1 trillion that will be purchased in Treasury and other debt instruments in the coming weeks.  Some would like to see more, others would prefer no QE2.

The consensus is no longer for a double-dip recession, but growth estimates for what lies ahead remain muted or have come down of late.  It seems that the current inflation is too low for the Fed targets but the recent trends in commodities may be taking care of much of the lack of inflation.  Extremely slow growth is not enough despite a recovery, and the hope is that more jobs will ultimately be created.

The FOMC wants inflation higher, yet it wants rates to stay very low.  These notions fly directly against each other in the long-term, and Ben Bernanke did not exactly get the name Helicopter Ben out of the blue.  It seems that our government is about to turn on the printing presses so it can buy debt.  Yep, devalue your currency but artificially keep the rates lower by buying the debt up.  It almost sounds like tech companies with stock options and non-GAAP earnings.

The rule is and has always been, “Don’t Fight the Fed.”  We can complain about the reckless nature of QE2 and the shackles it may put on the next two or three generations or we can generate trading strategies.

Gold in them thar hills…

When it comes to gold, the SPDR Gold Trust (NYSE: GLD) is king with millions of shares traded each day and with assets above $50 billion.  But what about leveraged ETF or ETN products?  If inflation is going to be manufactured and if gold keeps rising as world central banks race to devalue their currencies, then the PowerShares DB Gold Double Long ETN (NYSE: DGP) is your answer.  Keep in mind that this is an exchange-traded note rather than a true asset trust with physical gold.  The “DGP” gives double the performance of gold.

What about betting for or against currencies?

If everyone is devaluing at the same time, then about the only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc.  The Swiss Franc can be bought either directly or it can be bought via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

The other exception is potentially the Chinese Yuan if the U.S. Congressional move to try to wrangle China from such a tight currency peg.  If China were to de-peg, we have yet to find a real investor who says that China’s Yuan would actually fall against the US Dollar as China’s reserves and fundamentals are among the best globally.  There are two direct beneficiary ETF/ETN products here that will win if China is forced to appreciate the Yuan: WisdomTree Dreyfus Chinese Yuan (NYSE: CYB) and the Market Vectors Chinese Renminbi/USD ETN (NYSE: CNY), although the latter is far less liquid in volume.

Do you not believe that the dollar drop will continue endlessly?  As most financial events peak, markets do usually attempt to discount the news and try to at least work toward the efficient market theory where markets price in almost all available information and discount the rest of the news (so what if it doesn’t work).  If you believe that the Greenback will actually rally soon if and/or when QE2 finally launches, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  In short, this is the ETN that tracks the Deutsche Bank Long US Dollar Futures index, but be advised that the index is comprised of long futures contracts  rather than of raw currency.  It is also nearly impossible to forget the one rule if you are a US investor: You are already long the US dollar.

The ETFs are actively-managed and designed to earn current income that reflects money market rates that are available to foreign investors in the specific region. Additionally, they will be exposed to changes in non-U.S. currencies values compared to the U.S. dollar. Being actively-managed, the ETFs will have greater flexibility but still maintain the transparency that makes ETFs so attractive. This fund targets short-term, investment grade instruments and as a result, the share price is expected to be volatile.

The funds are expected to commence trading on Tuesday, May 13, 2008. The ETFs are listed below:

• WisdomTree Dreyfus Chinese Yuan Fund (NYSE Arca: CYB)
• WisdomTree Dreyfus Indian Rupee Fund (NYSE Arca: ICN
• WisdomTree Dreyfus Brazilian Real Fund (NYSE Arca: BZF)
• WisdomTree Dreyfus Japanese Yen Fund (NYSE Arca: JYF)
• WisdomTree Dreyfus Euro Fund (NYSE Arca: EU)

Rachel Lopez
May 1, 2008