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5 ETFs to Buy as Fed Maintains Bond Buying

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As widely expected, the Fed held interest rates steady at near-zero level in its latest meeting. U.S. interest rates have been this low since March 2020. The Fed will also continue its bond purchases worth $120 billion each month until the economy returns to full employment. The Fed also reiterated after its latest policy meeting that it expects to keep its benchmark short-term interest rate near zero through at least 2023 .

Inside Upbeat Economic Forecast

The Fed upgraded its forecast for 2021 GDP growth from 4% in September to 4.2% and beefed up the 2022 growth forecast from 3.0% to 3.2%. However, growth is likely to slow down in 2023 to 2.4% from 2.5%. The Fed projected the longer-run growth measure at 1.8%.

Unemployment was guided down to 5.0% from 5.5% for 2021, 4.2% from 4.6% for 2022 and 3.7% from 4.0% for 2023. PCE inflation expectation has gone up to 1.8% for 2021 from 1.7% projected in September and to 1.9% for 2022 (from 1.8%) but was kept same at 2% for 2023. Median Federal funds rate projections for 2021 was kept fixed at 0.1%.

Market Reaction

The immediate impact should be felt in the bond market, although the yield on 10-year U.S. Treasury remained unchanged from the prior day at 0.92%. Still, the yield curve steepened slightly. Wall Street cheered the Fed’s decision and projections.

Against this backdrop, investors can bet on the following ETFs for current income and likely capital appreciation.

Convertible Bonds – SPDR Bloomberg Barclays Convertible Securities ETF (CWB - Free Report)

Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The underlying Bloomberg Barclays US Convertible Liquid Bond Index is designed to represent the market of U.S. convertible securities. The fund yields 2.11% annually and charges 40 bps in fees (read: Convertible Bond ETFs: A Pandemic Winner).

Corporate Bonds – PIMCO Investment Grade Corporate Bond Index ETF (CORP - Free Report)

The underlying ICE BofAML US Corporate Index is an unmanaged index comprising U.S. dollar denominated investment grade, fixed-rate corporate debt securities publicly issued in the U.S. domestic market with at least one-year remaining term to final maturity and at least$250 million outstanding. These bonds are highly rated. The fund yields 2.89% annually and charges 20 bps in fees.

Online Retail – Proshares Online Retail ETF (ONLN - Free Report)

Economic improvement along with low rates should bode well for retail stocks. However, the COVID-19 pandemic and the social distancing measures made online retailing a winning proposition.

Small-Caps – iShares Russell 2000 ETF (IWM - Free Report)

Investors should note that small-cap stocks are likely to do better in a growing economy since these are tied more to domestic activities. So, with the GDP growth forecast being upgraded, investors have all reasons to play the small-cap ETF IWM.

Financials – SPDR S&P Bank ETF (KBE - Free Report)

If the yield curve steepens ahead, banking stocks may gain. Moreover, an improving economy is always great for banking stocks as these give cues of corporations’ and households’ better financial health. This, in turn, results in lower delinquency rate.

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