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Fed Less Likely to Taper Soon on Delta Concerns: ETFs to Buy

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As widely expected, the Fed held interest rates steady at a 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.

However, the Fed’s policymakers appear divided over the timing of the start of the QE tapering — the monthly bond purchases. Several regional Fed bank presidents support tapering soon, including James Bullard of the St. Louis Fed, Patrick Harker of the Philadelphia Fed and Robert Kaplan of the Dallas Fed.

But the Fed chief Powell has said that the central bank wants to see “substantial further progress” in terms of maximum employment and stability in price inflation before it would mull over lowering the bond purchases. The Fed wants inflation to moderately exceed its 2% average inflation target.

Notably, in recent months, inflation has been a concern thanks to steep price increases for things like used and new cars, hotel rooms and airline tickets. Pent-up demand after a prolonged lockdown has probably led to this.

Powell has also indicated that the Fed will signal its intention to taper “well in advance” of doing so. Many economists are of the opinion that any communication from the Fed will come in late August or September.

The benchmark U.S. treasury yield was 1.26% on Jul 28 versus 1.25% on Jul 27. Not much increase in the treasury yields indicate that the markets are not pricing any chances of a QE tapering in the near term. Against this backdrop, below we highlight a few ETFs that could be the winning picks at this moment.

ETFs in Focus

SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report)

Growth stocks fare better in a low-rate environment. The underlying S&P 500 Growth Index measures the performance of the large-capitalization growth sector in the U.S. equity market. The fund charges 4 bps in fees (read: A Spread of Top S&P 500 ETFs to Tap Solid Q2 Earnings Growth).

Technology Select Sector SPDR ETF (XLK - Free Report)

While low rates would boost growth sectors like technology, concerns over the Delta variant of COVID-19 would boost the stay-at-home stocks like technology. Big tech earnings have been stellar in the latest reporting season(read: Tech ETFs to Gain on Upbeat Apple, Microsoft Earnings).

SPDR S&P Bank ETF (KBE - Free Report)

If long-term rates rise on upbeat economic growth and short-term rates remain subdued on a dovish Fed, we will end up seeing a steepening in the yield curve. A steepening of the yield curve is good for banking stocks.

Vanguard Small-Cap Growth Index Fund ETF Shares (VBK - Free Report)

The combined force of an easy money policy and an upbeat U.S. economic growth momentum should bode well for domestically focused small-cap stocks.

iShares Edge MSCI USA Momentum Factor ETF (MTUM - Free Report)

The scenario would prove great for the stock market. The underlying index measures the performance of U.S. large and mid-capitalization stocks exhibiting relatively higher momentum characteristics.

Proshares Online Retail ETF (ONLN - Free Report)

Economic improvement along with low rates bodes well for retail stocks. Moreover, the COVID-19 pandemic and social distancing measures make online retailing a winning proposition.