The Federal Reserve raised the benchmark interest rate by 75 basis points last month for the third consecutive time after August’s consumer price index (CPI) increased higher than expected. The fifth-straight hike this year to the federal funds rate brings it to a range of 3% to 3.25%, the highest since 2008. The Fed’s new projections show the key rate to end this year at 4.25-4.5% and end 2023 at 4.5%-4.75%.
Moreover, the higher-than-expected employment data and hotter-than-expected CPI for September would keep the Fed on track to approve an aggressive rate hike in its November meeting. Overall, the lingering macro headwinds are increasing the odds of a recession.
The Conference Board’s profitability model predicted a 96% likelihood of a recession in the United States within the next 12 months. Furthermore, the last quarter of 2022 and the first quarter of 2023 are expected to witness negative real GDP growth rates.
With investors’ rising concerns over the macro headwinds, the CBOE Volatility Index has climbed more than 90% year-to-date, reflecting heightened market volatility.
Since the current economic uncertainties are expected to keep the stock market under pressure in the near term, we think investors should avoid ETFs Direxion Daily S&P Biotech Bull 3x Shares ETF (LABU), VanEck Gold Miners ETF (GDX), and KraneShares CSI China Internet ETF (KWEB), which might witness a downtrend.
Direxion Daily S&P Biotech Bull 3x Shares ETF (LABU)
Rafferty Asset Management, LLC manages LABU. It invests directly, through derivatives and other funds, in stocks of companies operating across health care, pharmaceuticals, biotechnology, and life sciences sectors. The fund provides daily 3x exposure to the S&P Biotechnology Select Industry Index.
LABU has assets under management of a total of $1 billion. The fund’s expense ratio of 0.96% compares with the category average of 1.02%. The fund’s top holding is Dreyfus Government Cash Management Funds Institutional (DGCXX), which has a 32.38% weighting, followed by Goldman Sachs Trust Financial Square Treasury Instruments Fund Institutional (FTIXX) at 6.39%. It has a total of 156 holdings.
LABU’s fund flows were $263.48 million over the past month and $211.41 million over the past three months. It has a beta of 3.8.
The fund has declined 82.8% year-to-date and 87.4% over the past year to close the last trading session at $6.75. It had a NAV of $6.74 as of October 12, 2022.
LABU’s poor performance is reflected in its POWR Ratings. The ETF has a rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The fund has a grade of F for Trade and Buy & Hold. It has a D grade for Peer. Within the F-rated Leveraged Equities ETFs group, it is ranked #39 among 101 ETFs.
Click here to see all the POWR Ratings of LABU.
VanEck Gold Miners ETF (GDX)
Van Eck Associates Corporation manages GDX. The fund offers investors indirect exposure to precious metals by investing in stocks of companies operating across materials, metals & mining, gold, and silver sectors worldwide.
GDX seeks to track the performance of the NYSE Arca Gold Miners Index by using the full replication technique. With $9.57 billion in AUM, GDX’s top holding is Newmont Corporation (NEM), which has a 13.15% weighting in the fund, followed by Barrick Gold Corporation (GOLD) at 10.54%, and Franco-Nevada Corporation (FNV) at 8.82%. It has a total of 50 holdings.
The fund’s 0.51% expense ratio compares to the category average of 0.48%. It has a beta of 0.69.
GDX has lost 39.7% over the past six months and 23.1% year-to-date to close the last trading session at $24.02. Its NAV was $23.97 as of October 12, 2022.
GDX’s POWR Ratings reflect its bleak prospects. It has an overall D rating, translating to a Sell in our proprietary rating system.
GDX has a D grade for Trade, Buy & Hold, and Peer. It is ranked #23 of 38 ETFs in the Precious Metals ETFs group.
Click here to see all GDX ratings.
KraneShares CSI China Internet ETF (KWEB)
KWEB offers pure-play exposure to Chinese software and information technology stocks. The ETF specializes in Chinese markets and is primarily owned by a leading Chinese investment bank.
Its portfolio is mainly dominated by well-known large-cap stocks like Alibaba and Tencent and holds a sizable chunk of mid and small-cap firms. It tracks the CSI Overseas China Internet Index.
KWEB has an expense ratio of 0.69% compared with the category average of 0.64%. It has a total of 160 holdings. The fund's top holdings include Alibaba Group Holding Ltd. (BABA), with a 9.60% weighting, and Tencent Holdings Ltd. (TCEHY), with a 9.23% weighting. KWEB has assets under management of $5.03 billion. It has a beta of 0.80.
KWEB has dropped 37.8% year-to-date and 54.2% over the past year to close the last trading session at $22.53. It had a NAV of $22.78 as of October 12, 2022.
KWEB’s POWR Ratings reflect its bleak outlook. The ETF has an overall POWR Rating of F, which equates to a Strong Sell. It also has an F grade for Trade and Buy & Hold and a D for Peer.
KWEB is ranked #25 among 40 funds in the F-rated China Equities ETFs group. Click here to view all ratings of KWEB.
LABU shares were trading at $7.02 per share on Thursday afternoon, up $0.27 (+4.00%). Year-to-date, LABU has declined -80.50%, versus a -22.28% 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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