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Fed Plays Safe As Expected, Outlook Positive: ETFs to Buy

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As widely expected, the Fed stayed put in its September meeting, keeping the rates unchanged in the 0.25–0.50% band. The Fed maintained its confident outlook on the U.S. economy but preferred to wait before implementing a rate hike until it sees signs of continued advancement. The decision was definitely not unanimous as was evident from 7-3 split in votes.

Investors should note that the Fed was expected to hike key rates this September, thanks to a strengthening economy. But downbeat job, manufacturing and retail data for the month of August muddled it all. Tepid inflation, muted business fixed investment and global growth issues were added threats, which put off the rate hike decision.

Underlying Trend More Hawkish

Though the Fed backed down from a rate hike, the undercurrent is quite hawkish. As per Bloomberg, “three officials, the most since December 2014 dissented in favor of a quarter-point hike.”  They were Esther George, president of the Kansas City Fed, Cleveland Fed President Loretta Mester and Fed Bank of Boston President Eric Rosengren.

The Fed specifically said that “although the unemployment rate is little changed in recent months, job gains have been solid, on average.” Not only this, the bank expressed confidence over household spending.

With this, the probable timeline shifts to December as the November meeting will happen just before the presidential election and the Fed is unlikely to hike rates during that sensitive time.  If the Fed does not hike rates in December, economic conditions will be called too soft to afford even a single 25-basis point hike in 2016 after a liftoff in December 2015. Also, the Fed’s credibility toward assessing the economic condition will also come under question.

On this ground, investors should note that a turmoil in the global investing backdrop and declining oil prices forced the Fed to halve its number of rate hike estimates for 2016 from four to two in its March meeting (read: ETFs that Won & Lost Post Fed Meet).

So, a December hike is quite justified at this level. As per data from CME Group, the probability of a final month hike increased to 59% following the Fed comments from 57% prior to the statements.

Inside Fed Projections

Notably, policy makers now envisage two rate hikes in 2017, down from the June median projection of three, as per Bloomberg. The Fed still expects three rate hikes in 2018 and another three in 2019. But at the same time, it cut its long-run target for fed funds to 2.9% from 3%, which is expected to be touched in 2020, at the earliest, as Fed funds rate for 2019 is expected to be 2.6%. Fed officials also reduced real GDP growth projection for this year to 1.8% from 2%.

Market Impact

Since the world was almost sure about a dovish Fed meeting, global stocks were in the green on September 21. Bank of Japan also came up with fresh changes in monetary stimulus on the same day thus cheering up the global markets.

Among the top ETFs, investors saw SPY gain about 1.12%. DIA rose about 0.9% and the tech-savvy (QQQ) gained about 1%. Also, all-world ETF iShares MSCI ACWI (ACWI - Free Report) advanced about 1.6%, iShares MSCI Emerging Markets (EEM - Free Report) jumped 2.8%, iShares MSCI Japan ETF (EWJ - Free Report) added over 2.9% and Vanguard FTSE Europe ETF (VGK - Free Report) moved 1.3% higher.

Some subtle moves in various markets and asset classes were also noticed. U.S. sovereign bond prices recorded gains on Fed meet while the yield on the 10-year U.S. Treasury note slipped to 1.66% on September 21 from 1.69% the day before. Yield on the six-month U.S. Treasury note dropped to 0.44% on the day from 0.49% recorded in the previous day. The U.S. dollar was a loser following a dovish Fed, with PowerShares DB US Dollar Bullish Fund (UUP) shedding over 0.4%.

ETFs to Buy

VanEck Vectors Junior Gold Miners ETF (GDXJ - Free Report)

As the dollar dipped, gold prices rose with SPDR Gold Shares (GLD - Free Report) adding about 1.5% on September 21. Though gold is shining, we suggest playing gold mining ETFs, which are on a tear lately. Most of the gold mining ETFs returned in 7–8% range post the Fed meeting. GDXJ was up over 8% on the day.

This is because if the rate hike bet strengthens, gold will eventually fall. But gold mining as a sector is quite strong now with the Zacks Industry Rank in top 34% at the time of writing (read: Gold ETF Investing: 10 Facts Investors Need to Know).

PowerShares DWA Utilities Momentum ETF (PUI - Free Report)

Since the possibility of a near-term rate hike has taken a backseat, rate-sensitive sectors like utility should gain momentum. PUI was up 2.24% on September 21. The fund yields about 3.45% annually (read: Utility ETFs Always a Safe Option for the Investors).

iShares Emerging Markets Dividend ETF (DVYE - Free Report)

Thanks to a few more days of cheap dollar inflows and a dovish BoJ meeting, emerging market (EM) equities surged. In any case, emerging markets are better-positioned in recent times.  The fund gives exposure to emerging market equities that have offered relatively high dividend yields on a sustained basis. The fund yields about 4.86% annually and was up over 2.7% on September 21.

Vanguard Extended Duration Treasury ETF (EDV - Free Report)

As long-term bond yields retreated, investors can play this long-term U.S. treasury ETF. The fund gained about 1.2% on the day and yields about 2.49% annually (read: Can Low Volatility ETFs Beat Bonds for Portfolio Stability?)

PowerShares High Yield Equity Dividend Achievers ETF (PEY - Free Report)  

In a falling treasury yield scenario, lure for dividends will likely rise, giving scope to funds like PEY. The fund gained about 1.6% on September 21 and yields about 3.30%.

Want more information on the world of ETFs? Make sure to check out the podcast below where we discuss the investing landscape with Kevin O’Leary and Connor O’Brien of O’Shares Investments:

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