A New Debt Ceiling Could Mean New Highs for Some ETFs

27-Jul-2011

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

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By Paul Ausick, 247Wallst,

Republican members of the US House of Representatives have passed the so-called “cut, cap, and balance” bill that would reduce federal expenditures, cap future spending, and introduce a balanced budget amendment to the US constitution. The bill has no chance of passing the US Senate and the President has already said he would veto any such legislation. The bill has met the required symbolic purposes, and legislators might now be able to forge ahead with a bill to raise the US debt limit and avoid a historic US default on its government debt.

As the government’s payment deadline of August 2nd gets ever nearer, we thought it might be interesting to look at several ETFs that stand to benefit from an agreement to raise the debt ceiling. In one way, every stock and fund benefits if the US manages to dodge a default on its debt, but we’ll leave the discussion for another day. Here are some funds we think will benefit when the deal is done:

* iShares Barclays 20+ Year Treasury Bond (NYSE: TLT)

* Direxion Daily Financial Bull 3X Shares (NYSE: FAS)

* Financial Select Sector SPDR (NYSE: XLF)

* ProShares UltraShort Gold (NYSE: GLL)

* ProShares UltraShort Silver (NYSE: ZSL)

* SPDR Barclays Capital High Yield Bond (NYSE: JNK)

* SPDR KBW Insurance (NYSE: KIE)

* Utilities Select Sector SPDR (NYSE: XLU)

The iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) posted its 52-week high almost a year ago and hit its its annual low in mid-February. Since then it has moved up a bit, but its share price is off about -3% for the trailing 12 months. Investors have begun to price in at least some of the effects of a raised debt ceiling, likely on the belief that the alternative is too awful to contemplate.

The Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is a triple-leveraged fund that bets on positive near-term moves in among financial stocks. Given the relatively weak performance of the big banks in the second quarter, a rise in the debt limit ought to give this fund a nice boost. It hit a year-to-date peak in February and has trickled downward since. For the trailing twelve months shares are off more than -15%.

The Financial Select Sector SPDR (NYSE: XLF) is another ETF tied to the financial sector, and while it’s recent trend has been down, shares have posted a gain of about 5% in the past 12 months. Again, raising the debt ceiling will have a positive impact on financial stocks, and XLF will bask in the glow.

The ProShares UltraShort Gold (NYSE: GLL) and the ProShares UltraShort Silver (NYSE: ZSL) are both double-leveraged bets against rising gold and silver prices. A new debt ceiling takes away some of the safe-haven attraction of gold and silver. The share price for the gold fund, GLL, is down about -48% in the past year and the silver fund, ZSL, is down a whopping -90%. Any good news is welcome here.

The SPDR Barclays Capital High Yield Bond (NYSE: JNK) invests in high-yield corporate debt, aka “junk,” where the risks are already high. An agreement on a new debt ceiling will likely improve the fund’s share price, which is already up about 3.75% for the past 12 months.

The SPDR KBW Insurance (NYSE: KIE) invests in insurance equities, and is currently well below its 200 day moving average. For the year its share price is up about 7%, but that’s a big drop from its highs in February, when shares were up more than 25% for the 12 months. Capital outflows from the fund in just the past couple of weeks have totaled more than $80 million. A new debt ceiling removes a good portion of the risk associated with insurers that might get caught up in the nastiness that will surely follow a federal default.

The Utilities Select Sector SPDR (NYSE: XLU) has gained more than 10.5% in the past 12 months. A raised debt ceiling offers some certainty to businesses, and that’s a good thing for a utility company. It would help if the businesses were planning to grow and use more electricity and natural gas. But, as with all things related to utilities, certainty is much, much better than its opposite.

Paul Ausick

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