All eyes are currently on the crucial FOMC meeting this week, as
the pullback in the easy monetary policy is just around the corner.
Investors wait with bated breath to see whether the Fed finally
trims its $85 billion in monthly bond purchases this time around.
In a recent
Wall Street Journal
poll of 46 economists, only one-fourth believes that the taper will
begin this week while one-third expect the announcement in January.
More than one-third of economists, however, expect the Fed to hold
off on the taper until the March 2014 meeting.
The likelihood of Fed tapering has increased in the recent weeks
given the slew of upbeat data and economic improvement. The first
and foremost driver is the healing labor market. The economy has
created 193,000 jobs in the past three months and the unemployment
rate has declined gradually. The rate is currently at a five-year
low of 7%.
Retail sales rose 0.7% last month buoyed by strong consumer
confidence and spending while the manufacturing sector also showed
strong signs of acceleration as well (read:
3 ETFs to Profit from the Manufacturing Upswing
Additionally, the congressional Democrats and Republicans are on
the verge of a tentative two-year budget deal, which if approved,
would end the fiscal instability in Washington. This suggests a
much stronger U.S. economic outlook heading into 2014.
Other positive developments in the economy include a solid housing
recovery and higher-than expected GDP growth in the third quarter.
However, inflation remained near the historical low at 1.1% in
November, well below the central bank's 2% target. This might stop
the Fed from QE tapering.
Given the large uncertainty in the Fed's stimulus program this
week, investors should pay close attention to the income-investing
corner of the world that could see heavy trading when the
announcement is finally made (read:
High Dividend ETFs to Buy Even If the Fed
As yields continue to rise, many investors remain concerned about
the income-generating securities in their portfolio. Below, we have
highlighted three such sectors that would be in focus and look to
be big movers from the upcoming Fed decision:
Thanks to soaring mortgage rates, mortgage REITs have been under
immense pressure and could be in more trouble if the Fed starts
scaling back its bond purchase program. Both 30-year and 15-year
mortgage rates again climbed to 4.42% and 3.43%, respectively.
With the taper announcement, short-term rates would rise faster
than the long-term rates thereby leading to a tight spread and
lower profits for mREIT companies. Meanwhile, if the Fed refrains
from tapering in this meeting, we could see a rebound in this
Investors could play this rebound in two ways:
iShares FTSE NAREIT Mortgage Plus Capped Index Fund (
Market Vector Mortgage REIT Income ETF (
. Though both are popular, REM has more AUM and volume while MORT
is a cheaper choice. Further, REM has a higher 30-Day SEC yield of
13.39% while MORT yields 11.22%.
From a year-to-date look, REM and MORT lost nearly 6% and 3%,
respectively, but could rise if tapering is again stalled (read:
Mortgage REIT ETFs in Focus on Renewed Taper
Bond mutual funds and ETFs have seen massive outflows this year as
their prices persistently slid on taper concerns. According to
Trim Tabs Investment Research
, total bond funds shed $70.7 billion so far this year through the
first week of December, edging past the annual record outflow of
$62.5 billion in 1994.
While long-term Treasury bond ETFs have been the worst hit by the
taper talk, the sell-off has hit almost all categories. There are a
number of bond ETFs to watch in this space, but investors could
keep a close eye on the ETF that provides broad exposure to the
bond market (read:
3 Bond ETFs Popular in the 'No Taper' Aftermath
PIMCO Total Return ETF (
is by far the largest actively managed bond ETF with a total asset
base of $3.6 billion and an annual fee of 55 bps. The fund provides
significant exposure to mortgage-backed securities (66%) and
Treasury bonds (21%).
About three-fifths of BOND's portfolio focuses on mid-term
securities ranging from 3-5 years and 5-10 years. Hence, the fund
would be in danger if the rates continue to rise. The ETF lost over
1.5% in the year-to-date time frame and pays a decent 1.64% in
terms of its 30-Day SEC yield.
The utility sector has seen a rough patch over the past few weeks
after the return of taper talk. Being defensive, the utility stocks
pay outsized yields and when interest rates rise, these become less
attractive dulling the appeal of utilities across the board (read:
Play Safe with These 3 ETFs
However, if Fed holds off on the taper, the sector would be back on
track with smooth trading ahead. While there are enough choices in
the space, investors should closely watch the ultra-popular
Utilities Select Sector SPDR (
Vanguard Utilities ETF (
With AUM of over $4 billion, XLU provides exposure to a small
basket of 31 securities with nearly 58% concentration on the top 10
firms. The ETF charges 0.18% in expenses and trades in heavy volume
of nearly 11 million shares a day (see:
all the Utilities ETFs here
On the other hand, VPU has amassed nearly $1.3 billion in assets
and charges 14 bps in annual fees. The fund is home to 78
securities and the top 10 companies hold about 46% of total assets.
While both the products delivered double-digit returns
year-to-date, they have lost over 2.5% since November.
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PIMCO-TOT RETRN (BOND): ETF Research Reports
MKT VEC-MTGE RE (MORT): ETF Research Reports
ISHARS-MTG RE (REM): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
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