OREANDA-NEWS. Federal Reserve officials signalled they would consider their first interest-rate increase since 2006 in their December policy-setting meeting, as the US economy continues to expand at a “moderate” pace.

The Federal Open Market Committee (FOMC) statement, released Wednesday after a two-day meeting in Washington, cited “solid” household spending and capital investment rates, as well as further improvement in the housing sector.

Despite a slower pace of job gains recently, underutilisation of labour market resources has also diminished, compared to earlier in the year, the statement added.

Although inflation remains persistently below the Fed’s target, the Committee reiterated it expects the level to rise gradually towards 2% in the medium term, buoyed by further improvements in the jobs market, and as the effects of falling energy and import prices ease, the statement said.

References to an “uncertain” outlook abroad, “heightened concerns” about growth in China, and “notable volatility” in global financial markets, made by Fed Chair Janet Yellen after the 16-17 September FOMC meeting, were noticeably absent this time round.

Most market participants took this as a sign of the Fed’s slightly hawkish tone and supporting the odds of a liftoff at its final policy-setting meeting of the year on 15-16 December.

Futures markets now indicate a 46% chance of the US central bank raising rates from near zero, where it has remained since late 2008, by its December meeting. This compares with a 37% probability before the release of the FOMC statement, according to data tracked by Bloomberg.

Excerpts from FOMC Statement 

“Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft… labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.”

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

US Economic Data

US gross domestic product rose at a 1.5% annualised rate in the July-September quarter as companies cleared out inventories, down from a 3.9% expansion in the previous three months. Excluding unsold goods, the economy grew 3%.

Jobless claims last week were little changed, holding near four-decade lows and reflecting steady improvement in the labour market.

While payrolls rose at a slower-than-expected rate in August and September, the pace of hiring this year has averaged almost 200,000 per month, beating the annual average in seven of the 10 years through 2014, according to Bloomberg data.

ETFs with US Equity Exposure

SGX lists nine ETFs with US equity exposure – DB X-Trackers S&P 500 UCITS ETF, DB X-Trackers S&P 500 Inverse Daily UCITS ETF, DB X-Trackers MSCI USA Index UCITS ETF, SPDR Dow Jones Industrial Average ETF, SPDR® S&P 500® ETF, ISHARES Dow Jones US Technology Sector Index Fund, ISHARES Core S&P 500 ETF, Lyxor ETF Dow Jones Industrial Average, and Lyxor ETF Nasdaq-100.

These nine ETFs have averaged total returns of 6.4% in the month-to-date and 1.4% in the year thus far. This brings their total returns over a 12-month and three-year period to 6.4% and 42.0% respectively.

The nine ETFs are detailed below and sorted according to MTD total returns.

Name SGX Code MTD Total Return YTD Total Return 12M Total Return 3Y Total Return
Lyxor ETF Nasdaq-100

H1Q

12.74

9.04

14.88

78.25
SPDRs® S&P 500® ETF

S27

9.49

0.52

6.74

59.67
db x-trackers S&P 500 UCITS ETF

K6K

9.44

1.15

6.84

55.37
Lyxor ETF Dow Jones Industrial Average

JC6

9.38

-0.98

5.69

N/A
SPDR® Dow Jones Industrial Average ETF

D07

9.32

-0.4

6.49

N/A
db x-trackers MSCI USA Index UCITS ETF

KF8

9.31

0.46

6.61

N/A
iShares Core S&P 500 ETF

I17

6.66

1.83

7.92

55.77
iShares Dow Jones US Technology Sector Index ETF

I21

0

4.44

12.47

43.96
db x-trackers S&P 500 Inverse Daily UCITS ETF

HD6

-9.07

-3.66

-10.04

-40.79
Average  

6.4

1.4

6.4

42

Source: SGX (as of 29 October 2015)

 

Short ETFs (also known as Inverse ETFs or Bear ETFs)

This type of synthetic ETF tracks the underlying index in the opposite direction. Investors who expect the index to fall can buy these Short ETFs, whose values rise when the underlying falls.

These funds use short selling, derivatives and other leveraged investment techniques to achieve the inverse (i.e. opposite) performance of the underlying index.

Most inverse ETFs reset each day, which means they are designed to achieve their stated objective on a daily basis. With the effects of compounding, over longer timeframes the results can differ significantly from their objective.

Because they reset each day, inverse ETFs typically are inappropriate as an intermediate or long-term investment. They may be appropriate, however, if recommended as part of a sophisticated trading or hedging strategy that will be closely monitored by a financial professional. At times, these strategies might justify a decision to hold a leveraged or inverse ETF longer than one day.

ETFs are investment funds listed and traded intraday on a stock exchange. The majority aim to track the performance of an index and provide access to a wide variety of markets and asset classes, including local stocks, international securities, bonds, commodities or money markets.

Each ETF gives investors access to the performance of the asset that comprises the underlying index. Investing in the ETF is also less costly if one was to build a similar portfolio by buying the individual stocks. It also provides exposure to international markets and asset classes that may be inaccessible to individual investors.