Despite the Fed’s several aggressive rate hikes this year, the Consumer Price Index (CPI) accelerated 8.2% year-over-year in September, exceeding expectations. Since the Fed is committed to reducing the inflationary pressures, the hotter-than-expected employment data and CPI report for September would keep the Fed on track to approve another massive rate hike in its upcoming meeting.
According to the economists at ABN Amro, “The inflation surprise seals a 75-bps hike taking place at the November FOMC meeting, and it raises the risk that the Fed may go even further than our current base case of the fed funds rate topping out at 4.5% in the upper bound.” Amid such policy tightening, recession odds are increasing.
Based on a recent survey by Bloomberg, the odds of the U.S. economy slipping into a recession within the next year climbed to 60%, with economists expecting the labor market and demand to become casualties in the Fed’s battle against inflation. Moreover, the IMF expects one-third of the world economy to contract this year or next.
Given the uncertain market and economic backdrop, it could be wise to avoid iShares 20+ Year Treasury Bond ETF (TLT), iShares MSCI Emerging Markets ETF (EEM), and Direxion Daily Small Cap Bull 3x Shares ETF (TNA), their underlying assets are expected to remain under pressure.
iShares 20+ Year Treasury Bond ETF (TLT)
BlackRock Fund Advisors manage this ETF. It tracks a market-weighted debt index issued by the US Treasury with remaining maturities of 20 years or more. It is an excellent option for investors seeking exposure to long-dated Treasuries. The fund is efficient from a cost perspective, offers exposure to hundreds of securities, and delivers impressive liquidity to those looking to execute a trade quickly.
TLT seeks to track the performance of the U.S. Treasury 20+ Year Index. With $23.97 billion in assets under management (AUM), TLT’s top holding is United States Treasury Bond 1.875% 15-Feb-2051, which has an 11.08% weighting in the fund, followed by United States Treasury Bond 2.0% 15-Aug-2051 at 7.73%, and United States Treasury Bond 1.625% 15-Nov-2050 at 6.86%. The fund has a total of 34 holdings.
The fund’s 0.15% expense ratio compares to the category average of 0.17%. It has a beta of negative 0.23. Its dividends have declined at an 8.4% CAGR over the past three years and a 4.6% CAGR over the past five years.
TLT has declined 32% year-to-date and 32.7% over the past year to close the last trading session at $98.09. Its NAV was $97.98 as of October 17, 2022.
TLT’s POWR Ratings reflect its bleak prospects. It has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
TLT has an F grade for Trade and a D for Buy & Hold and Peer. It is ranked #22 out of 40 ETFs in the Government Bonds ETFs group. Click here to access all ratings of TLT.
iShares MSCI Emerging Markets ETF (EEM)
EEM is one of the most popular ETFs, providing exposure to emerging economies' stock markets. It seeks to track the investment results of an index of large- and mid-capitalization emerging market equities. This ETF can be used as a short-term trade to increase exposure to risky assets and as a core holding in a long-term buy-and-hold portfolio.
The fund tracks MSCI Emerging Markets Index. It has $20.11 billion in AUM. Its top holdings include Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) with a 5.39% weighting, followed by Tencent Holdings Ltd. (TCEHY) with a 3.55% weighting, Samsung Electronics at 3.29%, and Alibaba Group Holding Ltd. (BABA) at 2.54%. It has a total of 1,240 holdings.
EEM’s fund outflows came in at $1.75 billion over the past month and $2.88 billion over the past six months. It has a beta of 0.79. Its expense ratio of 0.68% is higher than the category average of 0.49%.
EEM has slumped 20.3% over the past six months and 28.6% year-to-date to close the last trading session at $35.15. Its NAV was $35.10 as of October 17, 2022.
EEM’s poor performance is reflected in its POWR Ratings. The ETF has an overall D rating, equating to Sell in our POWR Ratings system.
EEM has an F grade for Trade and a D for Peer grade. It is ranked #47 of 100 ETFs in the Emerging Markets Equities ETFs group. Click here to get EEM’s rating for Buy & Hold.
Direxion Daily Small Cap Bull 3x Shares ETF (TNA)
TNA provides 3x daily long leveraged exposure to a market-cap-weighted index of nearly 2000 US small-cap companies as defined by the Russell 2000. The underlying index mainly contains the 1001st through the 3000th securities from the Russell 3000 index, covering nearly 10% of its total market capitalization.
TNA tracks the Russell 2000 Index (300%). It has a total of 6 holdings. The fund's top holdings include iShares Russell 2000 ETF (IWM) with a 60.25% weighting, Dreyfus Government Cash Management Funds Institutional with a 17.42% weighting, and Goldman Sachs Trust Financial Square Treasury Instruments Fund Institutional at 16.84%.
TNA has assets under management of $1.02 billion. It has an expense ratio of 1.05% compared with the category average of 1.02%. Its fund outflows were $8.93 million over the past five days. It has a beta of 3.62.
The fund has lost 42.6% over the past six months and 64.3% over the past year to close the last trading session at $32.07. It had a NAV of $29.28 as of October 14, 2022.
TNA’s POWR Ratings reflect its bleak outlook. The ETF has an overall POWR Rating of F, which equates to a Strong Sell in our proprietary rating system. It also has an F grade for Trade and Buy & Hold and a D grade for Peer.
TNA is ranked #43 among 101 funds in the F-rated Leveraged Equities ETFs group. Click here to view all ratings of TNA.
TLT shares rose $0.13 (+0.13%) in premarket trading Tuesday. Year-to-date, TLT has declined -32.54%, versus a -20.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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