How To Prepare For QE3

June 06, 2012

You hear, I hear it, we all hear it. The market is calling—no wait—screaming for a third round of quantitative easing.

Whether you ever agreed with the unconventional policy from the Federal Reserve, there’s no denying that ETF investors stand to benefit.

And, let’s face it—it was only a matter of time before we got here.

After QE2 played out—ending just about a year ago—Europe’s problems have dominated headlines and the market forgot about all those “green shoots.”

Now many observers are openly discussing whether Greece should stay in the European Union, while at the same time economic data from China points toward a slowdown.

All but sealing the deal for further quantitative easing was last week’s U.S. jobs numbers.

With unemployment now at 8.2 percent—up from 8.1 percent in April, and a presidential election looming—it’s not unreasonable to prepare for some easing from Fed Chairman Ben Bernanke.

QE Winners

There’s no doubt that equities stand to benefit the most from a new round of quantitative easing.

The SPDR S&P 500 ETF (NYSEArca: SPY) comes to mind first, but let’s look at things more broadly.

Total Returns During QE2

Total U.S. equity market performance wasn’t too shabby after QE2 was started.

In fact, from the moment QE2 was announced in November 2010 till the end of the program in June of last year, the Vanguard Total Stock Market ETF (NYSEArca: VTI) was up 12.63 percent, while SPY was up 11.34 percent.

Gold was another clear winner. The past year has been lackluster for the yellow metal, but should the Fed decide to pump more money into the system, the gold bulls will be returning strong.

During QE2, the SPDR Gold Shares ETF (NYSEArca: GLD), the world’s biggest bullion ETF, was up 10.67 percent.

In fact, as of last Friday, gold already started making some serious moves that seem to align with expectations of QE3.

After the disappointing jobs numbers, GLD rallied nearly 4 percent on the day.

It’s still debatable how suitable gold is as a hedge against inflation, but it seems unlikely that we wouldn’t see some strong spikes in gold should “Uncle Ben” make a move.

I hate to say it considering the way I see people rejoice at the falling prices at the gasoline pump these days, but QE3 definitely means higher prices for oil—and commodities in general.

Many wanted to blame speculators for the rise in oil prices last year, but really, QE2 played a huge role in the process.

Luckily, investors can still benefit.

 

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