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Red-Hot Income ETFs Post Fed Meet

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As expected, the Fed kept the short-term interest rates steady in the 0.25–0.50% band in its meeting. While economic activity has picked up given the spate of upbeat data in recent months, the job market has slowed down. This is especially true as the U.S. economy added only 38,000 jobs in May, marking the lowest level in six years (read: Dull U.S. Job Data Brighten These ETFs).

Additionally, the central bank hinted at more gradual rate hikes over the next few years amid global concerns, Brexit fears and a slowing economic growth. Though the Fed still expects two quarter percentage point rate increases this year, it downgraded its projection for the next two years. The central bank now projects three rate hikes in each of the next two years compared to four that it has estimated earlier. This implies federal funds rate of 2.4% at the end of 2018 and 3% in the longer run, down from the previous forecast of 3% and 3.3%, respectively.

This suggests that cheap money will flow into the economy for many more months than previously expected. According to the data from CME group, chances of a rate hike in July has dropped to 10% from 23%. The probability of a rate increase at the Fed’s September policy meeting was 26% compared with 37% earlier. The odds of the Fed tightening its policy at its December meeting were 48% compared with 54% previously.

The cautious stance has pushed the Treasury yields lower with the 10-year Treasury yields falling to the lowest closing level of 1.594% since December 2012. As a result, investors have duly turned their focus on the income-investing corner of the world that will likely see heavy trading in the days ahead.

Below we have highlighted four such high income areas that would be in focus and are big movers from the Fed decision:

Mortgage REITs

Mortgage REITs pay higher yields in the equity world, handily crushing the broad Treasury bond markets and other dividend payers. Additionally, these are the biggest beneficiaries of the lower rates as they invest in mortgage-backed securities and use short-term debt for financing their purchases, making money from the spread. If short-term rates rise slower than the long-term rates, it would lead to a wide spread and higher profits for mREIT companies (read: ETFs to Watch Post Dull Mortgage REIT Earnings).

Investors could play the upcoming surge in two ways: iShares FTSE NAREIT Mortgage Plus Capped Index Fund REM and VanEck Vectors Mortgage REIT Income ETF MORT. Though both are popular, REM has more AUM and is highly traded while MORT is a little cheaper. Further, MORT has a higher 30-Day SEC yield of 11.16% while REM yields 10.98%.

From a year-to-date look, both REM and MORT have gained over 10%. REM has a Zacks ETF Rank of 2 or ‘Buy’ rating while MORT has a Zacks ETF Rank of 3 or ‘Hold’ rating.


With lower rates, investors would pile more utilities across the board in search of juicy yields. This is especially true as utilities offer solid dividend payouts and excellent capital appreciation over the longer term. While there are enough choices in the space, Utilities Select Sector SPDR XLU and Vanguard Utilities ETF VPU are ultra-popular (read: Utility ETF Hits New 52-Week High).

With AUM of about $8 billion, XLU provides exposure to a small basket of 29 securities with nearly 60% concentration on the top 10 firms. The ETF charges 0.14% in expense ratio and trades in heavy volume of more than 16.1 million shares a day. On the other hand, VPU has amassed nearly $2.4 billion in its asset base and charges 10 bps in annual fees. The fund is home to 82 securities and the top 10 companies hold about 48.29% of total assets. Volume is moderate as it exchanges about 252,000 shares a day on average.

Both products have surged over 17% in the year-to-date timeframe and carry a Zacks ETF Rank of 3.


With rate hike not expected anytime soon and heightened uncertainty in the stock market, the appeal for dividend income ETFs remains intact. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (read: 7 Top Market-Beating Dividend ETFs to Buy Now).

The ultra-popular Vanguard Dividend Appreciation ETF (VIG - Free Report) , with an asset base of around $21.1 billion and average daily volume of more than 1.1 million shares, is in the limelight. It charges 10 bps in annual fees from investors and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating. The product has gained 6.3% so far this year. The other most popular funds – iShares Select Dividend ETF DVY and SPDR S&P Dividend ETF SDY – have AUM of $15.1 billion and $13.5 billion, respectively. The duo has a Zacks ETF Rank of 2 and has climbed over 2% so far this year.

High Yield Bonds

The high yield corner of the fixed income world is the most sought area post Fed meeting as falling yields have driven investors’ to high yield bonds. The two most ultra-popular ETFs in this space are iShares iBoxx $ High Yield Corporate Bond ETF HYG and SPDR Barclays High Yield Bond ETF JNK. Both products have a Zacks ETF Rank of 4 or ‘Sell’ and have gained 4% in the year-to-date timeframe (read: Is the Junk Bond ETF Rally Over?).

HYG has average maturity of 4.97 years while effective duration of 4.09 years. It has amassed $13.4 billion in its asset base while trades in heavy average daily volume of 14.3 million shares. It charges 50 bps in annual fees and has 30-Day SEC yield of at least 6.46%. On the other hand, JNK has average maturity of 6.58 years and modified duration of 4.47 years. It charges 40 bps in fees per year and trades in volume of more than 12.5 million shares per day on average. The ETF has AUM of $12.2 billion and a 30-Day SEC yield of 6.75%.

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