How the Fed Affects GDP

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.
Federal Reserve Building

The Fed Tapers While GDP Surges

It has been a big week of news so far, with this morning’s second-quarter gross domestic product (GDP) print showing the economy grew some 4% from April through June. That number was a welcome relief from the revised contraction of 2.1% in the winter-ravished first quarter.

The economy now seems on pace to deliver GDP growth of about 2%, which is not fantastic, but not bad either. I think what today’s GDP print tells us is that the Federal Reserve will almost certainly continue the taper of its bond-buying program. The Fed also will likely stay the course, depending on the data, and raise interest rates sometime in mid-2015.

That’s essentially the path the Fed took in its latest Federal Open Market Committee (FOMC) meeting. The central bank continued to taper its asset purchases by $10 billion per month, as expected, and it also left short-term interest rates alone at near-zero. The Fed’s statement contained language that acknowledged prices were climbing to their 2% inflation target. It also acknowledged improved economic conditions and an improving labor market.

We’ll soon know just how well the labor market did in July, as the official employment data comes out on Friday morning. I suspect that the number will reflect what we’ve seen of late, and that is a moderate-but-steady improvement on the jobs front.

The bottom line here is that the market has some positive data to support current equity levels. Now, however, we have to see if this is as high as things are going to get for a while — or whether we are in for a “sell-the-good-news” pullback that shakes things up.

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China ETFs: Now You Have a ‘Class A’ Choice

The world of ETFs just keeps getting bigger and better, with fantastic new choices spanning the entire globe. The latest sector demonstrating what I think is an extremely investable innovation is with ETFs pegged to the Chinese stock market.

As subscribers to my Successful ETF Investing advisory newsletter know, I have been bullish on China and the growth story for some time. Recent metrics from that country, such as the outstanding manufacturing sector readings showing the best growth in that critical segment in 18 months, argue nearly conclusively that the Chinese economy now has virtually no chance of the so-called “hard landing” that China skeptics have been predicting.

The positive China data, as well as economic growth around the globe, hasn’t been lost on the smart money. Take a look at the table here of Chinese ETFs. As you can see, the gains over the past one month, three months and year to date have been outstanding.

Ticker Name 1MO% 3MO% YTD% Yield%
CHIX Global X China Financials 11.80 20.28 4.45 0.47
KWEB Kraneshares CSI China Internet 4.09 20.23 15.76 1.02
YAO Claymore/AlphaShares China All-Cap 7.73 16.95 4.26 1.71
FXI iShares FTSE/Xinhua China 25 Index Fund 10.25 16.91 6.42 1.75
CQQQ Claymore/AlphaShares China Technology 3.44 16.51 7.07 0.74
QQQC Global X China Technology ETF 4.14 16.99 9.64 0.03
CHIM Global X China Materials ETF 11.50 15.77 7.30 1.54
CHXX Emerging Global Shares Index 12.26 16.19 2.82 1.41
PGJ WisdomTree India PowerShares Golden Dragon Halter China 3.07 15.51 5.11 1.11
FCHI iSHares FTSE China (HK Listed) Index 8.63 15.34 3.76 1.25
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These ETFs represent strong candidates for a China-focused portfolio, and my subscribers currently have several of these funds on their recommended buy lists. Yet these funds aren’t the only China ETFs out there I have my eye on.

SSEC_073014

The latest development is the advent of China A-shares funds, or shares traded primarily on the Shanghai Composite ($SSEC). Prior to ETFs that feature Chinese A-shares, it was very difficult for U.S. investors to buy stocks that trade on Chinese stock exchanges.

Yet thanks to funds such as the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) and the Market Vectors ChinaAMC A-Share (PEK), investors now can get direct exposure to stocks that trade in China.

There are a couple of other China A-share funds that currently trade, but not for long. Now there are 15 additional China A-share funds in the pipeline, awaiting regulatory approval. That means you’ll soon have about 20 China A-share funds to choose from, and that’s great for anyone who is a fan of Chinese stocks.

The advent of these funds also shows just how innovative the ETF world has become, so why would you buy anything else?

Liberty’s Slow Decay

“It is seldom that liberty of any kind is lost all at once.”

–David Hume

The brilliant David Hume knew that to preserve liberty, you have to recognize that it tends to decay slowly in societies that forget to hold it up as a core principle. Remember that the next time a new law or rule is imposed restricting your actions, and/or one that taps into your wallet.

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Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about how ETFs offer innovation. I also invite you to comment in the space provided below.

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