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As widely expected, the Fed stayed put in the latest meeting held this month. Key interest rates were kept unchanged at a target range of 1.5% to 1.75%. But the bank has acknowledged the gradual pickup in inflation.
Notably, U.S. consumer spending grew in March, while the Fed’s preferred inflation gauge touched the central bank’s 2% goal for the first time in a year. The personal consumption expenditures’ (PCE) price index marked the biggest increase since February 2017.
The Fed believes that the economy is likely to attain the central bank’s 2% goal in the medium term. The Fed has already enacted a hike in March and is expected to enact two more in 2018, of which the second is expected to come at the next policy meeting in June. There is 94% chance of a rate hike in June (read: 5 ETFs to Profit From Fed Activity & Guidance).
As far as the Fed’s view on economic recovery is concerned, the statement noted that "business fixed investment continued to grow strongly." Corporate earnings showed that companies look to boost fixed investment by more than 20%.
Meanwhile, the first reading of the U.S. GDP for the first quarter of 2018 advanced at a 2.3% annual rate of growth, above market expectations of 2%. Atlanta Fed expects the U.S. economy to grow at a 4.1% annualized rate in the second quarter (read: Q1 GDP Growth Beats Estimates: ETFs to Buy).
How Did Markets React Post Fed Meet?
Thanks to higher inflationary expectations and economic growth, the yield on benchmark bond yield was 2.97% on May 2, same as the day before. However, 20-and 30-year bond yields rose 1 bp each from the previous day.
On the other hand, the dovish stance of the Fed led short-and-medium term bond yields to slide. Two-year bond yields dropped 1 bp to 2.49% on May 2. The spread between 5- and 30-year yields widened after the Fed meet to 34 percentage points on May 2 from 31 percentage points on May 1. This clearly shows signs of a steepening yield curve.
As the yield curve steepens, stocks see a selloff. Top U.S. ETFs like SPDR S&P 500 ETF (SPY - Free Report) (down 0.7%), SPDR Dow Jones Industrial Average ETF (DIA - Free Report) (down 0.7%) and PowerShares QQQ ETF (QQQ - Free Report) (down 0.6%) were in the red on May 2.
Against this backdrop, investors can bet on the below-mentioned ETFs to gain some profits in a defamed month of May (read: 5 ETFs to Buy in Defamed May).
ETF Picks
iShares 1-3 Year Credit Bond ETF – Up 0.1% on May 2
As short-term bonds are less sensitive to rising rates and short-term bond yields specifically dived post Fed meet, investors can bet on this fund right now.
SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN - Free Report) – Up 0.7% on May 2
The fund gives exposure to debt instruments that pay a variable coupon rate, the majority of which are based on the three-month LIBOR, with a fixed spread. The fund has a low option adjusted duration of 0.11 years (read: Win From Rising Rates With These 4 ETF Strategies).
Unlike fixed coupon bonds, these do not lose value when the rates go up, making it ideal for protecting investors against capital erosion in a rising rate environment. Both factors make FLRN an intriguing choice to alleviate rising rate risks.
WisdomTree U.S. SmallCap Dividend Fund (DES - Free Report) ) – Up 0.4% on May 2
Investors should note that small-cap stocks are likely to do better in a rising rate environment since these are tied more to domestic activities and thus do not get hurt in a rising dollar environment (which is a likely outcome if interest rates rise). The fund yields about 2.87% annually.
SPDR S&P Retail ETF (XRT - Free Report) – Up 0.4% on May 2
An improving economy with a strengthening labor market and a moderately rising interest rate environment is great for consumer discretionary stocks. XRT can be thus on investors’ wish list.
PowerShares Preferred Portfolio (PGX - Free Report) – Up 0.1% on May 2
Preferred Stock ETFs are known for higher yields. Not only do preferred stocks offer considerably higher yields (often exceeding 5%), these also provide an opportunity for capital appreciation. These are hybrid securities having the characteristics of both debt and equity. So, PGX is a good pick and yields about 5.82% annually.
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Yield Curve Steepens After Fed Meet: ETFs to Tap
As widely expected, the Fed stayed put in the latest meeting held this month. Key interest rates were kept unchanged at a target range of 1.5% to 1.75%. But the bank has acknowledged the gradual pickup in inflation.
Notably, U.S. consumer spending grew in March, while the Fed’s preferred inflation gauge touched the central bank’s 2% goal for the first time in a year. The personal consumption expenditures’ (PCE) price index marked the biggest increase since February 2017.
The Fed believes that the economy is likely to attain the central bank’s 2% goal in the medium term. The Fed has already enacted a hike in March and is expected to enact two more in 2018, of which the second is expected to come at the next policy meeting in June. There is 94% chance of a rate hike in June (read: 5 ETFs to Profit From Fed Activity & Guidance).
As far as the Fed’s view on economic recovery is concerned, the statement noted that "business fixed investment continued to grow strongly." Corporate earnings showed that companies look to boost fixed investment by more than 20%.
Meanwhile, the first reading of the U.S. GDP for the first quarter of 2018 advanced at a 2.3% annual rate of growth, above market expectations of 2%. Atlanta Fed expects the U.S. economy to grow at a 4.1% annualized rate in the second quarter (read: Q1 GDP Growth Beats Estimates: ETFs to Buy).
How Did Markets React Post Fed Meet?
Thanks to higher inflationary expectations and economic growth, the yield on benchmark bond yield was 2.97% on May 2, same as the day before. However, 20-and 30-year bond yields rose 1 bp each from the previous day.
On the other hand, the dovish stance of the Fed led short-and-medium term bond yields to slide. Two-year bond yields dropped 1 bp to 2.49% on May 2. The spread between 5- and 30-year yields widened after the Fed meet to 34 percentage points on May 2 from 31 percentage points on May 1. This clearly shows signs of a steepening yield curve.
Long-term bond ETF iShares 20+ Year Treasury Bond ETF (TLT - Free Report) lost 0.1% on May while PowerShares DB US Dollar Index Bullish Fund (UUP - Free Report) advanced 0.5% on the day (read: Dollar ETFs Bounce Back: Can the Rally Continue?)
As the yield curve steepens, stocks see a selloff. Top U.S. ETFs like SPDR S&P 500 ETF (SPY - Free Report) (down 0.7%), SPDR Dow Jones Industrial Average ETF (DIA - Free Report) (down 0.7%) and PowerShares QQQ ETF (QQQ - Free Report) (down 0.6%) were in the red on May 2.
Against this backdrop, investors can bet on the below-mentioned ETFs to gain some profits in a defamed month of May (read: 5 ETFs to Buy in Defamed May).
ETF Picks
iShares 1-3 Year Credit Bond ETF – Up 0.1% on May 2
As short-term bonds are less sensitive to rising rates and short-term bond yields specifically dived post Fed meet, investors can bet on this fund right now.
SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN - Free Report) – Up 0.7% on May 2
The fund gives exposure to debt instruments that pay a variable coupon rate, the majority of which are based on the three-month LIBOR, with a fixed spread. The fund has a low option adjusted duration of 0.11 years (read: Win From Rising Rates With These 4 ETF Strategies).
Unlike fixed coupon bonds, these do not lose value when the rates go up, making it ideal for protecting investors against capital erosion in a rising rate environment. Both factors make FLRN an intriguing choice to alleviate rising rate risks.
WisdomTree U.S. SmallCap Dividend Fund (DES - Free Report) ) – Up 0.4% on May 2
Investors should note that small-cap stocks are likely to do better in a rising rate environment since these are tied more to domestic activities and thus do not get hurt in a rising dollar environment (which is a likely outcome if interest rates rise). The fund yields about 2.87% annually.
SPDR S&P Retail ETF (XRT - Free Report) – Up 0.4% on May 2
An improving economy with a strengthening labor market and a moderately rising interest rate environment is great for consumer discretionary stocks. XRT can be thus on investors’ wish list.
PowerShares Preferred Portfolio (PGX - Free Report) – Up 0.1% on May 2
Preferred Stock ETFs are known for higher yields. Not only do preferred stocks offer considerably higher yields (often exceeding 5%), these also provide an opportunity for capital appreciation. These are hybrid securities having the characteristics of both debt and equity. So, PGX is a good pick and yields about 5.82% annually.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>