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$1.9-T Stimulus to Boost U.S. Equity Demand? ETFs to Gain

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On Mar 6, the Senate approved President Joe Biden's $1.9-trillion stimulus package, sending the amended bill back for a vote in the House. The Democratic-controlled Senate voted 50-to-49 to pass the "American Rescue Plan" through reconciliation(read: ETFs to Win/Lose as Senate Okays Biden's $1.9T Relief Bill).

As the members in the Senate modified some provisions, the legislation needs to go back to the House that passed the previous version of the proposal last week. Both House and Senate have been working on the bill in top speed as unemployment insurance benefits expire on Mar 14 (read: Top ETF Stories of February Worth Watching in March).

U.S. Demand for Stocks to Rise?

This hefty fiscal stimulus should be great for U.S. households’ affordability.A solid amount of money injection should increase households’ demand for stocks. Goldman's chief U.S. equity strategist David Kostin expects households to be the largest source of equity demand this year, followed by corporations.

"We raise our household net equity demand forecast to $350 billion from $100 billion, which reflects faster economic growth and higher interest rates than we had assumed previously, additional stimulus payments to individuals, and increased retail activity in early 2021," per Goldman, as quoted on Yahoo Finance. Corporations’ U.S. equity demand this year is likely to be $300 billion.

Goldman's latest research revealed that net U.S. equity demand among households touched $307 billion in the first nine months of 2020.The jump in the 10-year yield to near 1.6% over the past month — caused by rising inflation concerns — put stress on markets.

But that did not curb the inflows to equity mutual funds and ETFs. Equity mutual funds and ETFs fetched in about $163 billion since the start of February, according to Goldman's research, as quoted on Yahoo Finance. We believe that suppressed current income in otherwise-safe fixed income securities probably led investors to equities.

Against this backdrop, below we highlight a few ETFs that could be in high demand ahead.

SPDR S&P 500 ETF (SPY - Free Report)

The S&P 500 has gained 14.2% on average during periods of rising interest rates compared with just 6.4% average gain in periods of falling rates, per BMO Capital Markets chief markets strategist Brian Belski's research going back to 1990, as quoted on Yahoo Finance.

The underlying S&P 500 Index is composed of 500 select stocks, all of which are listed on national stock exchanges and span over 25 different industry groups. The fund charges 9 bps in fees and currentlyhas a Zacks Rank #3 (Hold).

Vanguard High Dividend Yield ETF (VYM - Free Report)

Higher demand for equities along with solid current income makes this fund a great pick. The underlying FTSE High Dividend Yield Index which is consists of common stocks of companies that pay dividends generally higher than average. The fund has a Zacks Rank #2 (Buy) (read: Will March See a 'Taper-Tantrum'-Like Crisis? 6 ETF Plays).

iShares Russell 2000 ETF (IWM - Free Report)

Solid U.S. fiscal stimulus and a $1400-check to Americans are always positive for the domestically focused small-cap stocks. Rising rates may add strength to the U.S. dollar. This is going to favor small-cap stocks which are more domestically exposed. Since these companies do not have much exposure to the international markets, a higher greenback does not bother their profitability. The small-cap fund added about $1.21 billion in assets from Feb 26 to Mar 4.

Financial Select Sector SPDR Fund (XLF - Free Report)

With the Fed being dovish and risk-on sentiments boosting long-term yields, the yield curve will steepen further. The biggest winner of the steepening yield curve is the financial sector. Bargain hunting could also lead to some gains. The fund fetched in about $1.05 billion in assets since Feb 26. The fund has a Zacks Rank #3.

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