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4 ETF Zones to Invest in as Fed Signals No Rate Cuts in March
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The Federal Reserve, as expected, kept interest rates steady at a 23-year high in the range of 5.25% to 5.5% and signaled that it is in no rush to cut rates soon. This led to a broad sell-off in the market on Jan 31, bringing the volatility back.
The S&P 500 logged its worst day in four months, losing 1.6%, while the tech-heavy Nasdaq Composite Index declined 2.2%. Meanwhile, the CBOE Volatility Index (VIX), also known as the fear gauge, spiked 7.8% on the day (read: 4 Sector ETFs That Beat the Market in January).
"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%," the Fed said in its policy statement. This has pushed back market expectations of a cut as early as March. The likelihood that the Fed would cut rates by 25 bps at the March meeting fell to 36.4% from 54.1% before the announcement, according to the CME FedWatch tool.
Since the Fed initiated interest rate hikes last year, inflation has shown a notable decline and the pace of job creation has moderated. However, the Fed notes that prices in the economy are still comparatively high, even as economic growth continues at a steady rate. Fed Chair Powell acknowledged progress toward the Fed's dual mandate goals but emphasized that inflation remains above the desired level, with ongoing efforts to reduce it facing uncertainty and no guaranteed outcome. Powell highlighted the unpredictable nature of the economic path ahead.
Uncertainty about the timing of rate cuts has prompted investors to re-assess their portfolios, leading to higher demand for lower-risk securities. As a result, we have highlighted five zones and their popular ETFs where investors could stash their money amid the market turbulence.
Low Volatility - iShares Edge MSCI Min Vol USA ETF (USMV - Free Report)
Low-volatility ETFs have the potential to outpace the broader market in an uncertain market environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to the defensive sectors that usually have a higher distribution yield than the broader markets.
While there are several options, USMV, with AUM of $26.4 billion and an average daily volume of 3.5 million shares, is the most popular ETF. The fund charges 15 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings (read: 3 Reasons Why Quality ETFs Worth a Bet).
With AUM of $35.7 billion, iShares MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index and holds 125 stocks in its basket. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.5 million shares.
Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.
Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 349 stocks in its basket with AUM of $107.1 billion and charges 4 bps in annual fees. The ETF trades in volume of 2.5 million shares per day on average and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer 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: 5 ETF Tactics for Your Portfolio in 2024).
While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth, like VIG, seem to be good picks. The ETF has AUM of $74.2 billion and trades in a volume of 1.5 million shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.
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4 ETF Zones to Invest in as Fed Signals No Rate Cuts in March
The Federal Reserve, as expected, kept interest rates steady at a 23-year high in the range of 5.25% to 5.5% and signaled that it is in no rush to cut rates soon. This led to a broad sell-off in the market on Jan 31, bringing the volatility back.
The S&P 500 logged its worst day in four months, losing 1.6%, while the tech-heavy Nasdaq Composite Index declined 2.2%. Meanwhile, the CBOE Volatility Index (VIX), also known as the fear gauge, spiked 7.8% on the day (read: 4 Sector ETFs That Beat the Market in January).
"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%," the Fed said in its policy statement. This has pushed back market expectations of a cut as early as March. The likelihood that the Fed would cut rates by 25 bps at the March meeting fell to 36.4% from 54.1% before the announcement, according to the CME FedWatch tool.
Since the Fed initiated interest rate hikes last year, inflation has shown a notable decline and the pace of job creation has moderated. However, the Fed notes that prices in the economy are still comparatively high, even as economic growth continues at a steady rate. Fed Chair Powell acknowledged progress toward the Fed's dual mandate goals but emphasized that inflation remains above the desired level, with ongoing efforts to reduce it facing uncertainty and no guaranteed outcome. Powell highlighted the unpredictable nature of the economic path ahead.
Uncertainty about the timing of rate cuts has prompted investors to re-assess their portfolios, leading to higher demand for lower-risk securities. As a result, we have highlighted five zones and their popular ETFs where investors could stash their money amid the market turbulence.
Low Volatility - iShares Edge MSCI Min Vol USA ETF (USMV - Free Report)
Low-volatility ETFs have the potential to outpace the broader market in an uncertain market environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to the defensive sectors that usually have a higher distribution yield than the broader markets.
While there are several options, USMV, with AUM of $26.4 billion and an average daily volume of 3.5 million shares, is the most popular ETF. The fund charges 15 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Quality - iShares MSCI USA Quality Factor ETF (QUAL - Free Report)
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings (read: 3 Reasons Why Quality ETFs Worth a Bet).
With AUM of $35.7 billion, iShares MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index and holds 125 stocks in its basket. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.5 million shares.
Value – Vanguard Value ETF (VTV - Free Report)
Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.
Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 349 stocks in its basket with AUM of $107.1 billion and charges 4 bps in annual fees. The ETF trades in volume of 2.5 million shares per day on average and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Dividend - Vanguard Dividend Appreciation ETF (VIG - Free Report)
Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer 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: 5 ETF Tactics for Your Portfolio in 2024).
While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth, like VIG, seem to be good picks. The ETF has AUM of $74.2 billion and trades in a volume of 1.5 million shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.