The Fed's Fifth Rate Hike Moved ETF Markets
The Fed’s decision to increase rates by a further 75 basis points boosted returns for ETFs tracking the United States Dollar and the fixed income universe.
Silver and Gold Bullion ETFs found their way into last week’s top-performing ETFs in Canada amidst geopolitical tensions. Meanwhile, ETFs tracking the United States Dollar (“USD”) strengthened, driven by a surging greenback while fixed income ETFs joined the lineup thanks to ever-increasing yields.
Slight Gains for Silver and Gold ETFs
The U.S. Federal Reserve delivered three-quarters of a percentage point rate hike for the third consecutive time last week. Meanwhile, in Europe, comments from European Central Bank board (ECB) member, Isabel Schnabel, that inflation is more persistent than anticipated suggested that the ECB might pursue an additional rate increase trajectory.
While tightening monetary policy and interest rate hikes are generally thought to lessen the appeal of gold and silver this has not proven to be the case in recent times. Indeed the price of both metals shot up on Thursday with elevated geopolitical concerns driving demand for a modest safe haven. While the upward price movement was quickly outlived it was enough to push two silver and one Gold Bullion ETFs into the green. The Silver Bullion Trust ETF (SBT.B)secured the second spot on the list of Canadian weekly top-performing ETFs with returns of 4.90%, almost double that of the previous week which saw gains of 2.93%. Similarly, the iShares Silver Bullion ETF (SVR.C) continued its strengthening performance week on week going up 2.31%. On the gold side, the CI Gold Bullion Fund (VALT.U) rose 2.12% over the course of last week.
ETFs in play:
The Fed Cranks the Greenback Machine
The United States Dollar (“USD”) embarked on an upbeat run as the Fed moved to prevent inflation from eroding purchasing power. Rising interest rates in the U.S. have been the main catalyst behind the Dollar strength, increasing its appeal to domestic and foreign investors. The Dollar is nearing a historical high against the Japanese Yen and recently reached a 37-year high against the British Pound, with the pound since falling below $1.10. And with market observers projecting a 75 basis points hike in October to be followed by another 50 basis points hike in December the Dollar’s strong run is expected to continue over the short to medium term. The Horizons U.S. Dollar Currency ETF (DLR) – which offers a unique opportunity for investors to capture the positive performance of the United States Dollar against the Canadian Dollar – came in fifth on Canada’s top 20 performing ETFs list, climbing 2.49% and attracting USD$1 million of assets over last week.
ETFs in play:
Fixed Income ETFs Regain Appeal as Yields Soar
As the Fed goes full throttle on rate hikes, raising interest rates for the fifth time in a row, Treasury yields hit new highs. This isn’t particularly good news for investors looking at price appreciation due to the inverse relationship between bond prices and yields – bond prices typically fall with rising rates. On the flip side, this might be an opportune time for fixed income investors to collect coupons and pick up more yield.
Fixed income ETFs secured a total of 11 slots on Canada’s top performers' list last week with short duration funds taking the lion’s share. Most notably, Horizons USD Cash Maximizer ETF (HSUV.U) took third place on the list having moved 2.52% higher, whereas the BMO Ultra Short-Term US Bond ETF (ZUS.U) improved on the previous week’s returns with 2.50% vs. 1.73%. Similarly, the Horizons Active Ultra-Short Term U.S. Investment Grade Bond ETF (HUF.U) continued trading in the green, posting 2.35% of gains between September 19th and 23rd.
ETFs in play:
Data for this article is as of September 26th, 2022.
Please note this article is for information purposes only and does not constitute investment advice.
