Federal Reserve officials showed cautious optimism about U.S. economic recovery at the central bank’s April meeting, with some officials intending to discuss the scaling back of its massive bond purchases “at some point.”
“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,”
according to minutes from the Apr 27-28 Federal Open Market Committee meeting.
Investors should note that officials held interest rates near zero at the meeting and pledged to continue buying $80 billion in Treasuries and $40 billion in mortgage-backed securities every month until “substantial further progress” is seen on employment and inflation goals.
Against this backdrop, below we highlight a few ETFs that could be the winning picks if taper tantrum takes momentum.
iShares U.S. Regional Banks ETF ( IAT Quick Quote IAT - Free Report)
As regional banks fare well in a steepening yield curve environment, IAT has chances of gaining ahead. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pays less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.
Vanguard High Dividend Yield ETF ( VYM Quick Quote VYM - Free Report)
With the 10-year Treasury yield (
1.68% as on May 19, 2021) rising, income-loving investors would definitely look for other better options. VYM yields 2.83% currently. Plus, the dividend payout scenario has also improved within corporate America. Invesco Senior Loan ETF () BKLN Quick Quote BKLN - Free Report)
Senior loans are floating rate instruments and thus pay a spread over the benchmark rate like LIBOR, which helps in eliminating interest rate risk. This is because when interest rate rises, coupons on senior loans increase while the value of the bonds decline, keeping investments stable. Since these loans are issued by companies with below investment grade credit ratings, they usually pay yields to compensate for the risk.
Given this, senior loans and the related ETFs offer higher yields along with protection against any interest rate rise, making these ideal investments. Further, they carry lower credit risk than most other assets, with a similar level of yield and have low correlations with the other asset classes. Hence, investors can definitely play BKLN, which yields 2.96% annually.
Short MSCI Emerging Markets ProShares ( EUM Quick Quote EUM - Free Report)
Pressure in the emerging market space could spark off memories of the 2013 taper tantrum. Emerging market investments were badly beaten down then by talks of a Fed taper in early 2013. Higher rates in the United States along with a stronger dollar dulled the appeal of emerging markets around the globe, leading many to sell their shares. The same can happen now as well.
Apart from a higher dollar, some country-specific issues and the COVID-19 situation could also affect emerging market currencies. In such a situation, inverse emerging market ETFs like EUM could be a good bet. The underlying ProShares Short MSCI Emerging Markets seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the MSCI Emerging Markets Index.
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