All eyes are currently on the crucial two-day FOMC meeting slated to start today. The central bank is expected to hold rates steady and lay out plans to unwind its $4.5 trillion balance sheet. It will likely reduce bond holdings by a maximum of $50 billion per month, or $600 billion per year.
Both the latest Bloomberg survey and Reuters’ poll reveal that the Fed will unveil the timing of its balance sheet unwinding in September and wait until December to raise interest rates again. As such, rate sensitive ETFs are in vogue (read: Fed to Tighten Policy: Bet on These ETFs).
In the latest testimony, Fed Chair Janet Yellen stated that she is not in a rush to raise interest rates and will continue to follow a gradual rate hike plan given the lower inflationary pressure. U.S. consumer price remained flat in June against the expectation of a 0.2% increase, signaling doubts over the third rate hike this year. This represents year-over year growth of 1.6%, the smallest gain since October 2016, after a rise of 1.9% in May.
Per the central bank, interest rates are close to the neutral level – a level that neither encourages nor discourages economic activity. The current target for the funds rate is 1-1.25% while inflation is around 1.4%, implying that the real rate is close to zero, according to CNBC (read: Dovish Yellen Testimony to Boost These ETFs).
The Fed’s dovish view and dimming prospect of rates hike in the near term has pushed Treasury yields lower, which in turn is benefiting rate-sensitive and high-yield sectors such as utilities and real estates. Additionally, the ongoing turmoil in Washington and growing geopolitical concerns are making investors jittery, raising the appeal for these sectors. This is because these sectors act as a safe haven in times of market turbulence and concurrently offer higher returns due to their outsized yields.
As a result, investors could make a near-term play on rate sensitive sectors in the basket form, as these will continue to trade smoothly if interest rates remain steady. Below we have highlighted some ETFs from these sectors that could be excellent plays ahead of the Fed’s decision:
iShares Mortgage Real Estate Capped ETF (REM - Free Report)
This is the most popular mortgage REIT ETF with AUM of $1.4 billion and average daily volume of around 304,000 shares. It tracks the FTSE NAREIT All Mortgage Capped Index and holds 33 securities in its basket with large allocations to the top two firms – Annaly Capital (NLY - Free Report) and American Capital Agency (AGNC - Free Report) – that collectively make up for 26.6% share while other securities hold less than 7.4% share. The fund charges 48 bps a year as fees and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.
Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $7.6 billion, this fund provides exposure to a small basket of 30 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top four holdings at 32.5% of assets. Electric utilities takes the top spot in terms of sectors at 62.1%, closely followed by multi utilities (33.1%). The product charges 14 bps in annual fees and sees a heavy volume of more than 12.5 million shares on average. XLU has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook.
iShares U.S. Home Construction ETF (ITB - Free Report)
This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 45 stocks with double-digit allocation going to the top two firms – DR Horton (DHI - Free Report) and Lennar (LEN - Free Report) . Other firms hold not more than 9.3% of assets. Homebuilding takes the top spot at 66.1%, followed by 14.9% in building products and 7.9% in home improvement retail. The product has amassed $1.7 billion in its asset base and trades in heavy volume of around 2.8 million shares a day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook (read: Sector ETFs & Stocks to Tap Q2 Earnings Growth).
First Trust Consumer Staples AlphaDEX Fund (FXG - Free Report)
This ETF provides exposure to 40 consumer staples stocks by following an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25%. It is moderately concentrated on various components with none holding more than 5.16% share. About 40.4% of the portfolio is allocated to food products followed by food & staples retailing (27.3%), personal products (11%) and beverages (10.9%). The fund has amassed $467.8 million in its asset base while sees good volume of 138,000 shares a day on average. Expense ratio comes in at 0.61%. The product has a Zacks ETF Rank of 3 with a Medium risk outlook.
Global X SuperDividend U.S. ETF (DIV - Free Report)
This fund provides exposure to the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $415.6 million in its asset base while trades in moderate volume of about 82,000 shares. The ETF charges 45 bps in fees per year from investors. Holding 51 securities in its basket, the product is widely diversified across each component as none of these holds more than 2.82% of assets. Further, utilities and real estate are the top two sectors accounting for 25% and 24%, respectively. The product has a high annual dividend yield of 6.23% and has a Zacks ETF Rank of 3 with a Medium risk outlook (read: Dividend ETFs Are Hot on Likely Dovish Fed Outlook).
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