Last week, we wondered if the Federal Reserve’s newfound spirit of openness with regard to its interest rate policy might be counterproductive in terms of actually spurring investment. When corporations know that credit will be cheap at least through 2014, they may not be in any hurry to take advantage of historically low interest rates. That means their contribution toward any boost to the economy will occur over a longer time frame.

Of course, the rest of the market has less academic concerns.

The chart below shows the trailing-year performance of SPDR DB International Government Inflation Protected Bond (NYSE: WIP), which tracks the performance of inflation-protected securities issued by a number of nations from around the world.

Source: Bloomberg

As the chart above shows, the fund’s share price has spiked by about 6 percent since the Fed’s announcement that it plans to hold its benchmark rate at current levels through 2014. And with the fund currently trading at a 1.7 percent discount to net asset value, the real bump in the value of the fund’s 82 underlying holdings is closer to 8 percent.

One could argue that the fund’s performance isn’t correlated to the Fed’s action since its portfolio holds no US Treasury Inflation-Protected Securities (TIPS). And there hasn’t been a similar move in TIPS since the Fed’s announcement.

But the fund’s top five holdings–which account for 53 percent of assets—are bonds issued by the United Kingdom, France, Italy, Sweden and Canada. Since the Fed’s announcement in late January, there’s been no news out of these nations that significantly impacts their inflationary outlook. In fact, Europe is facing the possibility of a recession, which is a deflationary event by definition. Based on the timing of the spike in the ETF’s price, it seems fairly evident that it’s driven by the Fed’s latest move.

And while the SPDR DB International Government Inflation Protected Bond has jumped in price, we’ve seen similar gains from emerging markets and commodities, as measured by iShares MSCI Emerging Markets Index (NYSE: EEM) and PowerShares DB Commodity Index Tracking Fund (NYSE: DBC). Meanwhile, the US dollar has suffered a sharp decline.

The market seems to expect that emerging markets and commodities will enjoy robust inflows of cheap US dollars, a scenario which could potentially drive a fresh bout of global inflation. Meanwhile, central banks in Europe and China are also providing substantial monetary easing. There’s a strong likelihood that we’re setting up for a repeat of 2010.

On Expenses

As we’ve noted previously, exchange-traded fund (ETF) sponsors are in a cutthroat competition over expense ratios. In furtherance of this trend, State Street Global Advisers announced that it is cutting the annual fees of its nine SPDR sector ETFs by 10 percent, which reduces their expense ratios to 0.18 percent from 0.20 percent. That makes them the least expensive broad sector ETFs on the market. The funds affected by this move are:

• Consumer Discretionary Select Sector SPDR (NYSE: XLY)
• Consumer Staples Select Sector SPDR (NYSE: XLP)
• Industrial Select Sector SPDR (NYSE: XLI)
• Utilities Select Sector SPDR (NYSE: XLU)
• Technology Select Sector SPDR (NYSE: XLK)
• Materials Select Sector SPDR (NYSE: XLB)
• Energy Select Sector SPDR (NYSE: XLE)
• Health Care Select Sector SPDR (NYSE: XLV)
• Financial Select Sector SPDR (NYSE: XLF)

These funds have long been favored by ETF investors who use sector rotation strategies, and the fact that they’re now even cheaper should add to their popularity.

What’s New

BlackRock added five new sector funds and two new geography-specific funds to its iShares line of ETFs last week.

In keeping with the trend toward offering greater exposure to small caps, iShares MSCI All Country Asia ex Japan Small Cap Index Fund (NSDQ: AXJS) was launched last Friday. Domestic small caps are rarely international enterprises, so this ETF offers small-cap investors exposure to emerging market growth trends.

The fund allocates 19.1 percent of assets to the financial sector, followed by information technology (18.1 percent), consumer discretionary (17.5 percent), industrials (15.7 percent) and materials (11.6 percent).

From a geographic perspective, the fund allocates 25.5 percent of assets to Taiwan, followed by South Korea (19.5 percent), China (17.1 percent) and Hong Kong (10.0 percent). While the fund’s exposure includes other countries such as India, Malaysia and Indonesia, more than 70 percent of the fund’s assets are allocated to its top five geographies.

The fund charges a 0.75 percent annual expense ratio.

iShares MSCI India Index Fund (BATS: INDA) is largely similar to other India-specific ETFs. Like those other funds, it uses the MSCI India Index as its benchmark. The fund charges a 0.65 percent annual expense ratio.

Among the new sector funds, iShares MSCI Global Agriculture Producers Fund (NYSE: VEGI) is particularly interesting. While there are already a number of agricultural ETFs, this new fund’s 0.39 percent annual expense ratio makes it the least expensive offering in this niche. And its portfolio of 147 stocks also makes it the most diversified. However, the fund’s subsector exposures are largely similar to other available funds.

Given the popularity of the iShares product line, it shouldn’t take long for this ETF to build a respectable level of trading volume. Once that happens, it could be the favored vehicle for investors seeking exposure to agriculture.

iShares MSCI Global Energy Producers (NYSE: FILL) will focus on major oil, natural gas and coal producers, while iShares MSCI Global Select Metals & Mining Producers (NYSE: PICK) will focus primarily on large, established mining outfits.

The two remaining funds offer precious metals plays, with iShares MSCI Global Gold Miners (NYSE: RING) focusing on gold miners and iShares MSCI Global Silver Miners (NYSE: SLVP) devoted to silver producers.

These new sector funds use a market-cap weighted index, so the largest companies will dominate their performance. Each ETF charges a 0.39 percent annual expense ratio.

Portfolio Roundup

Please see this week’s issue of Global ETF Profits.