Is Government Shutdown A Bull Market Threat? ETFs In Focus

The U.S. government finally shut down on Friday midnight as dispute over immigration between Democrats and Republicans lead to the failure of a last-minute deal to fund government operations. The shutdown has stretched for three days after the Senate failed to strike a deal to break an impasse before the working week starts in Washington.

This is the first U.S. government shutdown since 2013, when the shutdown lasted for 16 days. The Senate has scheduled a vote for today at noon on a stopgap spending measure to extend government funding through Feb 8.

Is This A Real Threat?

The event doesn’t seem much of a real threat given that the U.S. stock market has shown strong complacency even as fears of government shutdown flared up in Washington last week. Both the S&P 500 and the Dow Jones zoomed to another record high on Friday given strong economic fundamentals and a bullish outlook for the companies. With this, U.S. stocks have witnessed a record of almost 400 days without a 5% reversal, underpinned by sustained low volatility (read: Market at New Highs: Mega Cap ETFs & Stocks On A Roll).

The S&P 500 capped its third straight weekly advance to post the best start since 1987 while global stock funds raked in a record $58 billion over the last four weeks, according to Bank of America Corp (NYSE:BAC). research based on EPFR data. This includes $23.9 billion inflows last week, with the largest share going to the U.S. funds.

The euphoria surrounding the new tax legislation has been the biggest driver of the rally. The massive $1.5-trillion tax cuts will create an economic surge both domestic and international, boosting job growth and earnings of corporates. Additionally, the Q4 earnings season is off to a strong start, with earnings from 53 S&P 500 companies that have reported results, up 11.7% from the same period last year on 7.5% higher revenues, with 81.1% beating EPS estimates and 75.5% beating revenue estimates. Overall, total earnings and revenues are projected to grow 10.3% and 7.1%, respectively. Further, jump in oil prices, a weak dollar, and rounds of upbeat economic data have added to the strength.

While a short-term government shutdown will not hurt the U.S. economy, a prolonged impasse could dampen investors' confidence in riskier assets prompting a reversal of the current market trend. As such, we have highlighted ETFs that are on investors’ radar this week following the shutdown.

SPDR S&P 500 ETF Trust (AX:SPY)

S&P 500 index futures declined a modest 0.08% in a pre-market trade today at the time of writing, indicating lower opening for the market today and this ultra-popular ETF with a total AUM of around $292.1 billion and average daily volume of 69.9 million shares. It tracks the S&P 500 index and holds 505 stocks in its basket with each holding less than 3.9% of assets. The fund is widely spread across a number of sectors with information technology, financials, health care, consumer discretionary and industrials each accounting for s double-digit exposure. The product charges 9 bps in fees per year and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: U.S. ETFs in Focus as Market Cap Hits $30 trillion).

SPDR Gold Trust ETF (V:GLD)

Gold price edged up initially on safe haven buying post government shutdown but slipped in today’s trading session at the time of writing. Although the bullion is often viewed as a store of value and hedge against market turmoil, the product tracking this bullion like GLD (NYSE:GLD) could not benefit from this turmoil as history shows that gold prices tend to fall during US government shutdown. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $36 billion and heavy volume of nearly 7.3 million shares a day. It charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.

iPath S&P 500 VIX Short-Term Futures ETN VXX

Volatility returned to the market with the government shutdown. The fear gauge, as represented by the CBOE Volatility Index, jumped 11% last week on fears of government shutdown, signaling investor panic starts to set in. The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility in the S&P 500 Index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second months VIX futures contracts. The note has amassed $1 billion in AUM and charges 89 bps in fees per year. Volume is heavy exchanging 31.2 million shares in hand per day on average.

PowerShares DB US Dollar Bullish Fund UUP

The dollar languished to a three-year low against a basket of currencies on heightened fears of government shutdown, marking its longest losing streak since May 2015. It nevertheless regained some footing in today’s trading session supported by higher Treasury yields. Since UUP offers exposure against a basket of six world currencies, euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, it is in the limelight. The fund has so far managed an asset base of $500.8 million while sees an average daily volume of around 1.1 million shares. It charges 80 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs & Stocks to Buy on Falling Dollar).

iShares 20+ Year Treasury Bond ETF (V:TLT)

The 10-year Treasury yields continued their ascent and hit its highest level since 2014 at 2.642%, flashing waves of selling in the bond market. The products tracking the long end of the yield curve seems to be hardest hit though they provide investors safe haven investments. TLT tracks the ICE U.S. Treasury 20+ Year Bond Index. It is one of the most popular and liquid ETFs in the bond space with AUM of $6.8 billion and average daily volume of more than 8.2 million shares. Expense ratio comes in at 0.15%. Holding 30 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 25.83 years and effective duration of 17.54 years. The fund has an unfavorable Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Prepare for Bond Bear Market With These ETFs).

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ISHARS-20+YTB (TLT): ETF Research Reports

GOLD (LONDON P (GLD): ETF Research Reports

SPDR-SP 500 TR (SPY (NYSE:SPY)): ETF Research Reports

PWRSH-DB US$ BU (UUP): ETF Research Reports

IPATH-SP5 VX ST (VXX): ETF Research Reports

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