Federal Reserve Chairman Powell yesterday hinted that the Federal Reserve could hike interest rates further and faster than previously expected to tame inflation as the latest economic data came in stronger than expected. US prices rose an unexpected 0.5% from December to January, while monthly retail sales and employment data came in stronger than expected.
Over the past year, the Fed has raised interest rates to over 4.5% – the highest rate since 2007 – in response to prices rising at their fastest pace in decades. Powell said he could urge the bank to raise rates above the 5% to 5.5% forecast in December. According to CME’s FedWatch tool, markets are now pricing in a nearly 70% chance of a 50 basis point rate hike at the Fed’s March 21-22 monetary policy meeting, up from about 30% a day ago, according to Reuters.
“Powell essentially opened the door to a 50 basis point hike,” said Chris Weston, head of research at Pepperstone, as quoted by Reuters. Yields on shorter government bonds continued their rise on March 7, 2023. The 6-month US Treasury yield increased 10 basis points from the previous day to 5.32% on 7-Mar-2023 escape to safety.
In response to Powell’s comments,SPDR S&P 500 ETF Trust SPY, SPDR Dow Jones Industrial Average ETF Trust DIA and Invesco QQQ Trust QQQ lost about 1.53%, 1.74%, and 1.23% on March 7, 2023. Exchange-traded product used to measure market volatility iPath.B S&P 500 VIX Short-Term Futures ETN VXX is up about 2.2% on the day.
Why Choose Long/Short ETFs?
Against this background, investors can increase their exposure to long/short ETFs in order to bypass stock market weakness. Investing in long-short ETFs now seems prudent as it offers opportunities to seek profit and protection at the same time. The long-short investment strategy takes long positions in securities that are expected to rise and short positions in securities that are expected to fall. Below we highlight a few long/short ETFs that have outperformed the S&P 500 (up 0.41%) over the past week.
ETFs in focus
Hull Tactical US ETF HTUS – Up 2.83%
Hull Tactical’s process allows it to adapt to changing market conditions and factor relationships, and to respond to sudden changes in market and economic conditions. The fund’s expense ratio is 1.00%.
Franklin Systematic Style Premia ETF FLSP – Up 1.80%
This ETF is active and does not represent a benchmark. The Fund seeks to maintain a relatively low correlation to traditional asset classes and to seek positive returns in rising or falling markets. The fund seeks to keep risk within predetermined limits by investing across four style factors: quality, value, momentum and carry; within and across multiple asset classes. The fund charges fees of 65 basis points.
Convergence Long/Short Equity ETF CLSE – Up 1.77%
Convergence’s investment process captures the best qualities of both quantitative and fundamental methods. This ‘quantamental’ investment approach combines the bottom-up fundamental methods of its experienced managers with tools and technology to efficiently organize large amounts of investment data. The fund’s expense ratio is 1.56% annually.
Changebridge Capital Long/Short Equity ETF CBLS – Up 1.49%
The Changebridge Long/Short Equity ETF seeks long-term capital appreciation while minimizing volatility. The fund also aims to generate positive alpha over an investment cycle from both the long and short portfolios. The fund has the potential to improve an investor’s return profile while reducing risk. The fund’s expense ratio is 1.70% annually.
Global X S&P 500 Covered Call ETF XYLD – up 1.34%
The underlying Cboe S&P 500 BuyWrite Index attempts to replicate the performance of a hypothetical buy-write strategy on the S&P 500 Index. XYLD seeks to generate income by writing covered calls, which has historically resulted in higher returns during periods of volatility. The fund has an annual return of 12.73% and charges fees of 60 basis points.
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Invesco QQQ (QQQ) ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
Hull Tactical US ETF (HTUS): ETF Research Reports
Global X S&P 500 Covered Call ETF (XYLD): ETF Research Reports
Changebridge Capital Long/Short Equity ETF (CBLS) ETF Research Reports
Convergence Long/Short Equity ETF (CLSE): ETF Research Reports
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