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How to Trade Powell's Comments on Economy With ETFs
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Fed chair Jerome Powell recently commented on U.S. economic and corporate health amid the COVID-19 outbreak. Global lockdowns and financial squeeze both on household and corporate fronts will leave a prolonged adverse impact, per the Fed chief.
Powell also indicated that jobless numbers will appear more like the 1930s, when the rate peaked to as high as 25%. Notably, the unemployment rate jumped to 14.7% in April — the highest number since the Bureau of Labor Statistics began collecting this data in 1948 — and is expected to jump further in May.
However, what he said was not all gloomy. Below we highlight a few ETF strategies that could gain on the hope that Powell’s statement gave for the near term.
Bet on America Over the Long Term
The Fed chairman cautioned that the current downturn “may last until late 2021.” He also said that the U.S. economy could "easily" contract by 30% in the second quarter. However, he expressed confidence that the economy would recover over the long term, and said he would never bet against the U.S. economy. He does not see the economy entering another Depression, per CNBC.
A super-dovish Fed and a Congress, which have already passed about $3 trillion in rescue funds and is planning another round, would hold the economy back from slipping into a depression. The Fed also indicated that the central bank is not out of ammunition and can expand existing programs or add new ones, if needed.
Powell’s comments over long-term U.S. economic recovery and ultra-easy monetary policies in other countries should make U.S. dollar stronger in the coming days. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) and VelocityShares Daily 4x Long USD Vs GBP ETN (DGBP) are some of the products to play the trend.
Should You Bet More on Investment-Grade Bond ETFs?
The Fed indicated that a blend of lower expected earnings and higher debt (which is likely to lead to lower interest coverage ratios) could “trigger a sizable increase in firm defaults.” This means it would be wise to stick to the highly-rated bonds of companies because that would lower default risks.
Moreover, the Fed is buying highly rated corporate bonds. However, the Fed cannot own more than 20% of any one ETF or 10% of individual corporate bonds. Agreed, the Fed said it would expand its bond-buying program to include debt that was investment-grade rated as of Mar 22 but later downgraded to no lower than BB-, or three levels into high yield. But putting more focus on investment-grade ones should make your portfolio safe (read: Highly Rated Corporate Bond ETFs to Gain on Fed Buying).
It makes the likes of SPDR Portfolio Long Term Corporate Bond ETF (SPLB - Free Report) and Vanguard Long-Term Corporate Bond ETF (VCLT - Free Report) compelling while puts the likes of SPDR Bloomberg Barclays High Yield Bond ETF (JNK - Free Report) in a tight spot.
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How to Trade Powell's Comments on Economy With ETFs
Fed chair Jerome Powell recently commented on U.S. economic and corporate health amid the COVID-19 outbreak. Global lockdowns and financial squeeze both on household and corporate fronts will leave a prolonged adverse impact, per the Fed chief.
Powell also indicated that jobless numbers will appear more like the 1930s, when the rate peaked to as high as 25%. Notably, the unemployment rate jumped to 14.7% in April — the highest number since the Bureau of Labor Statistics began collecting this data in 1948 — and is expected to jump further in May.
However, what he said was not all gloomy. Below we highlight a few ETF strategies that could gain on the hope that Powell’s statement gave for the near term.
Bet on America Over the Long Term
The Fed chairman cautioned that the current downturn “may last until late 2021.” He also said that the U.S. economy could "easily" contract by 30% in the second quarter. However, he expressed confidence that the economy would recover over the long term, and said he would never bet against the U.S. economy. He does not see the economy entering another Depression, per CNBC.
A super-dovish Fed and a Congress, which have already passed about $3 trillion in rescue funds and is planning another round, would hold the economy back from slipping into a depression. The Fed also indicated that the central bank is not out of ammunition and can expand existing programs or add new ones, if needed.
While Sprott Junior Gold Miners ETF (SGDJ - Free Report) , Invesco Dynamic Building & Construction ETF (PKB - Free Report) and ALPS Medical Breakthroughs ETF (SBIO) are some of the small-cap picks to tap the U.S. economic recovery, growth ETFs like Vanguard Growth ETF (VUG - Free Report) and SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) can also be played (read: Bet on "American Magic" With 4 Solid Small-Cap Sector ETFs).
Dollar Strength in the Cards?
Powell’s comments over long-term U.S. economic recovery and ultra-easy monetary policies in other countries should make U.S. dollar stronger in the coming days. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) and VelocityShares Daily 4x Long USD Vs GBP ETN (DGBP) are some of the products to play the trend.
Should You Bet More on Investment-Grade Bond ETFs?
The Fed indicated that a blend of lower expected earnings and higher debt (which is likely to lead to lower interest coverage ratios) could “trigger a sizable increase in firm defaults.” This means it would be wise to stick to the highly-rated bonds of companies because that would lower default risks.
Moreover, the Fed is buying highly rated corporate bonds. However, the Fed cannot own more than 20% of any one ETF or 10% of individual corporate bonds. Agreed, the Fed said it would expand its bond-buying program to include debt that was investment-grade rated as of Mar 22 but later downgraded to no lower than BB-, or three levels into high yield. But putting more focus on investment-grade ones should make your portfolio safe (read: Highly Rated Corporate Bond ETFs to Gain on Fed Buying).
It makes the likes of SPDR Portfolio Long Term Corporate Bond ETF (SPLB - Free Report) and Vanguard Long-Term Corporate Bond ETF (VCLT - Free Report) compelling while puts the likes of SPDR Bloomberg Barclays High Yield Bond ETF (JNK - Free Report) in a tight spot.
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 >>