After the plan to install Larry Summers as the next Fed Chairman fell through, many gravitated around the next obvious choice—and the frontrunner for some all along—Janet Yellen. As the current Fed Vice Chairwoman, Janet Yellen was seen as a natural pick as the follow up to Bernanke, and someone that wouldn’t rock the boat too much (unlike Summers).
Thanks to this, it doesn’t come as much of a surprise that President Obama has nominated Yellen to take the top job at the Federal Reserve. And should she pass the confirmation process, many are speculating that she will keep Bernanke’s easy money policies intact, making for a smooth transition.
That is because Yellen is seen as a huge supporter of QE programs, and most believe that she will have a dovish take on policy (much like the current chairperson). As such, many are expecting QE to take quite some time to wind down under a Yellen-led Federal Reserve, suggesting that we could see long periods of low rates if she passes the Senate confirmation process.
While markets reacted favorably initially to the report, there was also a lot of other market noise on the day. There were concerns over budgetary negotiations, while there are also worries that there might actually be the start of the taper this year after all. Both of these issues spooked markets on the session, and definitely stole the show from the Yellen announcement.
Still, over the long term, a Yellen Federal Reserve could act as a boost to markets, and help to keep the status quo intact. While many might not be happy with this, it will definitely help stocks in the long run, assuming of course she sticks to a robust-QE program should she take the reins from Bernanke (see 3 ETF Winners from the No Taper Shocker).
If this happens, it will definitely benefit several key sectors of the market, any of which could see a nice boost with her at the helm of the Fed. Below, we have highlighted three such ETFs which could be top picks for the long term if Yellen can take over the Federal Reserve and continue easy money policies for the U.S. economy:
One segment that has been crushed as bond rates have risen is the high yield market. This is because as yields rise, it dulls the appeal of low growth/high income stocks, putting a cap on gains for this sector. However, if rates stabilize here, we could see some fresh interest in the space, suggesting Yellen could help to rekindle some interest in the high yield market.
One way to play this trend is by investing in the Global X SuperDividend U.S. ETF (DIV - ETF report). This fund tracks 50 stocks in the INDXX SuperDividend U.S. Low Volatility Index, giving exposure to 50 firms that rank among the highest dividend paying equities in the U.S.
With this profile, the fund has roughly 24% in utilities, 18.7% in Mortgage REITs, and then 14% in MLPs. The product does utilize an equal weight method, so concentration risk isn’t an issue, as no single firm makes up more than 3% of the total (also see Are There Really High Dividend, Low Risk ETFs?).
Investors should note that this ETF currently has a 30-Day SEC yield of 6.7%, making it an excellent income choice for the U.S. market. The fund is down a bit since its inception earlier in the year, but it pretty much mirrored the bond market during the taper talk, so this could be a solid performer (and high yielder to boot) if Yellen keeps easy money policies in place.
As yields have slowly risen in the past couple of months, investors have already seen the impact on the housing market. Interest in housing as slowed due to the rising yield environment, suggesting a dovish Fed Chairwoman would help to breathe some life back into the sector.
There are a couple of housing related ETFs that could play this trend, any of which would benefit from a dovish Federal Reserve. However, we like the SPDR S&P Homebuilder ETF (XHB - ETF report) a bit more than its counterpart the iShares US Home Construction ETF (ITB - ETF report) to play this trend.
That is because XHB is more of a broad play on the housing sector—including retail and homebuilders—while ITB solely focuses on homebuilders and materials. While both are likely to benefit, lower rates now are likely to keep the housing recovery alive and boost the retail side of the story, which is why we are focusing on XHB for now (also see Housing ETFs to Watch on a Prolonged Shutdown).
This SPDR fund utilizes an equal weight methodology for its exposure, and it doesn’t hold more than 5% in any one stock. Homebuilders still take the top spot at just under 30% of assets, while building products (24.1%), and home furnishing retail (17.9%) round out the rest of the top three.
This fund isn’t much of a yield destination, but it has seen some pretty solid performances lately. XHB has doubled in the past two years, but as worries over higher rates have hit, the ETF has floundered, suggesting that a stop to higher rates will be welcomed news for this product.
Broad Emerging Markets
When taper talk intensified, emerging market stocks were crushed, as traders pulled out of these high beta names and sought dollar-denominated exposure instead. However, if rising rates are capped in the near term and the U.S. stays dysfunctional on a political front, investors may cycle back into emerging markets, suggesting that Yellen could be good for this segment too.
There are literally dozens of emerging market ETFs currently out there, so investors have plenty of choice in this space. While a targeted play on one of the beaten down nations—like India or Indonesia—are interesting long term bets, another route could be by looking at the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS - ETF report).
This ETF combines everything that has been hit by higher rates; emerging markets, small caps, and dividends, and rolls it into one fund. All of these segments have been impacted by the higher rate talk, so they may see some strength if Yellen follows through on a dovish policy track (see all the Emerging Market ETFs here).
The product follows the WisdomTree Emerging Markets SmallCap Dividend Index, holding small cap companies that are in the WisdomTree Emerging Markets Dividend Index. Investors should note that unlike many funds, DGS weights by annual cash dividends paid, so items like market cap don’t matter for the weighting here.
Once again, the portfolio is quite spread out with financials (20.8%), industrials (16.3%), and consumer discretionary (14.7%) taking the top three spots. No single company accounts for more than 2% of the total, so concentration issues aren’t a problem either.
From a country look though, we do see a heavy focus on Asia, specifically with a 27.2% allocation to Taiwan. Beyond that, Malaysia, South Korea, South Africa, Thailand and Brazil round out the top six and all make up at least 8.4% of the portfolio.
The fund does pay a pretty robust yield of just over 6%, though it has faced weakness lately. The ETF is down over 5% in YTD terms, with the bulk of the losses coming in the summer, a time that was pretty rough for all emerging markets. However, the product rebounded in September, and with a lower likelihood of higher rates, we could see more strength in this ETF in the months ahead.
Investors shouldn’t be too surprised that President Obama has nominated Janet Yellen as the next Fed Chairperson. She was arguably the logical choice all along, and will probably not stray too far from the path that Bernanke has laid out already (see all the top Ranked ETFs here).
While this might not be great news for the dollar or inflation in the long run, a number of stock segments could definitely benefit. While Yellen as Fed chair could be broadly good for the markets, we think that the three aforementioned ETFs will really shine, and thus might be good choices for long term investors seeking a way to play this change in leadership at the world’s most important central bank.
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