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Worried About Tax Hike and Surging Yields? 5 ETFs to Bet On
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After rebounding strongly from the pandemic lows, the U.S. stock market continued to show strength on speedy economic recovery expectations backed by rapid COVID-19 vaccinations and unprecedented stimulus.
The Fed’s latest comments are also driving the stocks higher as it has raised the forecasts for growth and inflation. The Fed lifted GDP growth projection from 4.2% to 6.5% for this year — the fastest pace since 1984. Inflation is expected to rise 2.4% this year and then slow down next year to 2% (read: Fed Bumps Up Economic Growth Forecasts: ETFs to Play).
However, the surge in yields and Biden’s first major federal tax hike since 1993 made investors jittery. Higher yields have sparked fears of overvaluation in the technology stocks after an astounding performance during the pandemic. This is especially true as the sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. Rise in long-term yields lower the present value of companies’ future earnings.
Meanwhile, the tax hike plan will weigh on companies’ earnings and equity allocations in the short term. Biden is widely expected to raise corporate tax rate to 28% from 21% but below the pre-Trump level of 35%. The new administration is also looking to increasing the top marginal tax rate to 39.6% from 37% and taxing capital gains and dividends at the higher ordinary income tax rate. Goldman strategists expect higher corporate taxes to cut the S&P 500 earnings by 3% in 2022 while a JPMorgan Chase team also projects it to be a “drag on earnings growth and buybacks” (read: ETFs to Follow If Tax Hike Comes After $1.9-T Biden Stimulus).
Given this, investors should bet on the stock world with some caution. Below, we have highlighted few ETFs that could prove compelling choices amid the backdrop of economic recovery and concerns over the upcoming tax hike and surging yields:
The fund has the potential to generate positive returns regardless of the direction of the stock market as long as low beta stocks outperform high beta stocks. It invests in low-beta securities and at the same time shorts high-beta stocks of approximately equal dollar amounts within each sector. It seeks to deliver the spread return between low and high-beta stocks. This can easily be done by tracking Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The ETF has AUM of $99.4 million and an expense ratio of 2.19%. It trades in average daily volume of 96,000 shares.
This fund seeks to mitigate significant downside market risk as it invests in a portfolio of "out of the money" put options purchased in the U.S. stock market. The TAIL strategy offers the potential advantage of buying more puts when volatility is low, and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate-term U.S. the majority of fund assets will be invested Treasuries. The product has amassed $326.8 million in its asset base and charges 59 basis points (bps) in annual fees from investors. It trades in average daily volume of 352,000 shares.
With AUM of $19.4 billion, this fund provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. It holds 125 stocks in its basket with each making up for no more than 4.2% share. The ETF charges 15 bps in annual fees and trades in average daily volume of 1.4 million shares (read: Bet on Quality ETFs to Combat the FOMC Meeting Worries).
This ETF aims to achieve the real return (above inflation), capital preservation and greater exposure to changes in real interest rates inherent in long maturity TIPS by tracking the BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index. It holds 13 stocks in its basket with effective maturity of 23.61 years and effective duration of 21.34 years. The fund has amassed $601.9 million in its asset base and trades in average daily volume of 170,000 shares. It charges 20 bps in annual fees.
This fund targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 328 stocks in its basket with each accounting for no more than 3%. The ETF has AUM of $71.9 billion and charges 4 bps in annual fees. It trades in volume of 3.2 million shares per day on average and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 3 ETFs to Invest in Cheapest Value Stocks).
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Worried About Tax Hike and Surging Yields? 5 ETFs to Bet On
After rebounding strongly from the pandemic lows, the U.S. stock market continued to show strength on speedy economic recovery expectations backed by rapid COVID-19 vaccinations and unprecedented stimulus.
The Fed’s latest comments are also driving the stocks higher as it has raised the forecasts for growth and inflation. The Fed lifted GDP growth projection from 4.2% to 6.5% for this year — the fastest pace since 1984. Inflation is expected to rise 2.4% this year and then slow down next year to 2% (read: Fed Bumps Up Economic Growth Forecasts: ETFs to Play).
However, the surge in yields and Biden’s first major federal tax hike since 1993 made investors jittery. Higher yields have sparked fears of overvaluation in the technology stocks after an astounding performance during the pandemic. This is especially true as the sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. Rise in long-term yields lower the present value of companies’ future earnings.
Meanwhile, the tax hike plan will weigh on companies’ earnings and equity allocations in the short term. Biden is widely expected to raise corporate tax rate to 28% from 21% but below the pre-Trump level of 35%. The new administration is also looking to increasing the top marginal tax rate to 39.6% from 37% and taxing capital gains and dividends at the higher ordinary income tax rate. Goldman strategists expect higher corporate taxes to cut the S&P 500 earnings by 3% in 2022 while a JPMorgan Chase team also projects it to be a “drag on earnings growth and buybacks” (read: ETFs to Follow If Tax Hike Comes After $1.9-T Biden Stimulus).
Given this, investors should bet on the stock world with some caution. Below, we have highlighted few ETFs that could prove compelling choices amid the backdrop of economic recovery and concerns over the upcoming tax hike and surging yields:
AGFiQ US Market Neutral Anti-Beta Fund (BTAL - Free Report)
The fund has the potential to generate positive returns regardless of the direction of the stock market as long as low beta stocks outperform high beta stocks. It invests in low-beta securities and at the same time shorts high-beta stocks of approximately equal dollar amounts within each sector. It seeks to deliver the spread return between low and high-beta stocks. This can easily be done by tracking Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The ETF has AUM of $99.4 million and an expense ratio of 2.19%. It trades in average daily volume of 96,000 shares.
Cambria Tail Risk ETF (TAIL - Free Report)
This fund seeks to mitigate significant downside market risk as it invests in a portfolio of "out of the money" put options purchased in the U.S. stock market. The TAIL strategy offers the potential advantage of buying more puts when volatility is low, and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate-term U.S. the majority of fund assets will be invested Treasuries. The product has amassed $326.8 million in its asset base and charges 59 basis points (bps) in annual fees from investors. It trades in average daily volume of 352,000 shares.
iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)
With AUM of $19.4 billion, this fund provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. It holds 125 stocks in its basket with each making up for no more than 4.2% share. The ETF charges 15 bps in annual fees and trades in average daily volume of 1.4 million shares (read: Bet on Quality ETFs to Combat the FOMC Meeting Worries).
15+ Year U.S. TIPS Index ETF (LTPZ - Free Report)
This ETF aims to achieve the real return (above inflation), capital preservation and greater exposure to changes in real interest rates inherent in long maturity TIPS by tracking the BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index. It holds 13 stocks in its basket with effective maturity of 23.61 years and effective duration of 21.34 years. The fund has amassed $601.9 million in its asset base and trades in average daily volume of 170,000 shares. It charges 20 bps in annual fees.
Vanguard Value ETF (VTV - Free Report)
This fund targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 328 stocks in its basket with each accounting for no more than 3%. The ETF has AUM of $71.9 billion and charges 4 bps in annual fees. It trades in volume of 3.2 million shares per day on average and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 3 ETFs to Invest in Cheapest Value Stocks).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>