The latest Fed meeting held on Mar 16 came across as hawkish. The Federal Reserve raised interest rates by a quarter of a percentage point and projected that its policy rate would be in the range
of 1.75% and 2% by the year's end in a newly aggressive stance to fight the red-hot inflation. Hence, new Federal Reserve projections indicate six more rate hikes this year, per CNBC.
The Federal Funds rates are now projected in the range of 1.6% to 2.4% for 2022 (from 0.6% to 0.9% projected in December). For 2023, the same is projected in the range of 2.4% to 3.1% (from 1.4% to 1.9% range) and for 2024, the same is projected to be in the range of 2.4% to 3.4% (from 1.9% to 2.9% range).
The Fed also hiked its inflation forecast for the year. The central bank now expects median inflation rate to jump to 4.3% this year, higher than its previous forecast of 2.6%. PCE inflation expectation has gone up to 2.7% for 2023 from 2.3% projected in December. The Fed downgraded its forecast for 2022 median real GDP growth from 4% in December to 2.8% for 2022. However, it kept the growth rate expectations same at 2.2% for 2023 and 2% for 2024.
With the possibility of a hawkish Fed in 2022, government bond yields should start rising. Hence, ETFs that fare better in a rising rate environment, should be tapped now. This is especially true given that the global risk-on sentiments (and the resultant rise in rates) will take a leap in the near term on the promise of a fat fiscal support in China.
Only one deterrent is there, i.e., the Russia-Ukraine war. If that chaos gets resolved soon, oil prices will also come down from the scorching high levels and inflation could also be managed by simple monetary policy tightening. Against this backdrop, investors can bet on the following ETFs for current income and likely capital appreciation.
Value – SPDR Portfolio S&P 500 Value ETF ( SPYV Quick Quote SPYV - Free Report)
With U.S. economic growth projections seeming decent, yields are likely to see a modest but steady uptrend. Rising rates are good for value stocks than the growth ones as the latter’s cash flows come way out in the future. Thus, this group seems less valuable in a rising rate scenario as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. So, it’s better to go for mature value stocks.
Financials – SPDR S&P Bank ETF ( KBE)
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 a lower delinquency rate.
High Dividend – SPDR Portfolio S&P 500 High Dividend ETF ( SPYD Quick Quote SPYD - Free Report)
The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. SPYD charges 7 bps in fees and yields as high as 3.63% annually (read:
Guide to High Dividend Paying ETFs). Floating Rate Bonds -- iShares Floating Rate Bond ETF ( FLOT Quick Quote FLOT - Free Report)
Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to the traditional bonds.
Convertible Bonds – SPDR Bloomberg Barclays Convertible Securities ETF ( CWB Quick Quote 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 fund yields 2.27% annually and charges 40 bps in fees.