Quantitative easing, or QE2, is coming to a head.  What we will see depends upon whom you ask, and the verdict seems to depend on the direction of the wind each day.  QE2 may also be the epitome of “give it to me now and we’ll just deal with consequences later.”  This last weekend we outlined what quantitative easing was and we wanted to give the best and brightest ETFs for each major sector play that could win big or lose big  as a result.

The FOMC can no longer lower rates on the short-end.  The other side of the coin is that it can promise to keep rates low indefinitely.  Quantitative easing is accomplished by Uncle Sam expanding its balance sheet by buying up debt on the long-end of the yield curve and keeping rates at near-zero on the short-end.  The new verdict seems to be a few hundred billion rather than $1 trillion that will be purchased in Treasury and other debt instruments in the coming weeks.  Some would like to see more, others would prefer no QE2.

The consensus is no longer for a double-dip recession, but growth estimates for what lies ahead remain muted or have come down of late.  It seems that the current inflation is too low for the Fed targets but the recent trends in commodities may be taking care of much of the lack of inflation.  Extremely slow growth is not enough despite a recovery, and the hope is that more jobs will ultimately be created.

The FOMC wants inflation higher, yet it wants rates to stay very low.  These notions fly directly against each other in the long-term, and Ben Bernanke did not exactly get the name Helicopter Ben out of the blue.  It seems that our government is about to turn on the printing presses so it can buy debt.  Yep, devalue your currency but artificially keep the rates lower by buying the debt up.  It almost sounds like tech companies with stock options and non-GAAP earnings.

The rule is and has always been, “Don’t Fight the Fed.”  We can complain about the reckless nature of QE2 and the shackles it may put on the next two or three generations or we can generate trading strategies.

Gold in them thar hills…

When it comes to gold, the SPDR Gold Trust (NYSE: GLD) is king with millions of shares traded each day and with assets above $50 billion.  But what about leveraged ETF or ETN products?  If inflation is going to be manufactured and if gold keeps rising as world central banks race to devalue their currencies, then the PowerShares DB Gold Double Long ETN (NYSE: DGP) is your answer.  Keep in mind that this is an exchange-traded note rather than a true asset trust with physical gold.  The “DGP” gives double the performance of gold.

What about betting for or against currencies?

If everyone is devaluing at the same time, then about the only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc.  The Swiss Franc can be bought either directly or it can be bought via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

The other exception is potentially the Chinese Yuan if the U.S. Congressional move to try to wrangle China from such a tight currency peg.  If China were to de-peg, we have yet to find a real investor who says that China’s Yuan would actually fall against the US Dollar as China’s reserves and fundamentals are among the best globally.  There are two direct beneficiary ETF/ETN products here that will win if China is forced to appreciate the Yuan: WisdomTree Dreyfus Chinese Yuan (NYSE: CYB) and the Market Vectors Chinese Renminbi/USD ETN (NYSE: CNY), although the latter is far less liquid in volume.

Do you not believe that the dollar drop will continue endlessly?  As most financial events peak, markets do usually attempt to discount the news and try to at least work toward the efficient market theory where markets price in almost all available information and discount the rest of the news (so what if it doesn’t work).  If you believe that the Greenback will actually rally soon if and/or when QE2 finally launches, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  In short, this is the ETN that tracks the Deutsche Bank Long US Dollar Futures index, but be advised that the index is comprised of long futures contracts  rather than of raw currency.  It is also nearly impossible to forget the one rule if you are a US investor: You are already long the US dollar.

Betting on the Long-Bond…

If you genuinely believe that Ben Bernanke and friends can drive down the long-term rates to even under the current lows, there is of course the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) ETF.  This one pays dividends (Treasury yields) based on the current yield of the Treasury index, yet there is no leverage.

There is the leveraged side of the equation in bond ETFs. We try to stick to family-to-family comparisons.  ProShares Ultra 20+ Year Treasury seeks daily investment results of double the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index. Do you not trust the move in long-term bond yields?  No worries… The anti-QE2-effect trade is via the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) which is double-short the Barclays Capital 20+ Year U.S. Treasury Bond index.

General Stocks

If you have high hopes that QE2 will just help every sector out there, there is nothing more liquid than the SPDR S&P 500 (NYSE: SPY).  This has no leverage to it, but it trades almost 200 million shares a day and generally tracks within a few basis points of the S&P 500.  The SPDR Dow Jones Industrial Average (NYSE: DIA) is meant to track the Dow Jones Industrial Average within a few basis points. This one also has no leverage and it trades “only” about 7 million shares a day.

If you just want NASDAQ or tech-oriented ETFs, there is the PowerShares QQQ (NASDAQ: QQQQ).  This tracks the NASDAQ 100 and trades over 70 million shares on an average day.  Just keep in mind that the QQQQ has almost 30% of its weighting tied up in Apple (almost 20% alone), Microsoft and Google.

Financial Stocks

Banks and financials have been very volatile.  The new risks emerging from the foreclosure moratorium over disclosures and fraud have a potential mess for the banks.  At issue, and assuming that issue can quietly quiet down, is that QE2 would be good for the banks.  They earn little on interest but they have to pay almost no interest as well. When it comes to trading financial stocks each day, the triple-leverage funds from Direxion take the cake.  There is the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ), and they are exactly what they sound like with triple leverage.  The bullish shares trade close to 35 million shares a day and the bearish shares trade close to 45 million shares a day.  Keep in mind that there is deemed a greater risk of tracking error on these due to the volatility, futures contracts, and more.  The moves are also now supposed to track the performance on an intraday basis.

While we have noted the basic ETFs here that can be used to trade with or against QE2, there are probably a dozen other secondary or tertiary ETF and ETN products out there.  Generally we default to the most liquid ETF rather than the most volatile ETF.

Whatever QE2 happens to be, you’ll know it when you see it.

JON C. OGG

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