Markets

No Rate Hike Until 2023: Here's How to Play With ETFs

As widely expected, the Fed held interest rates steady at a near-zero level in its latest meeting. U.S. interest rates have been this low since March 2020. The central bank said that it will continue to purchase $120 billion in government bonds each month. The Fed will keep interest rates at zero at least through 2023.

Despite the Fed’s promise to keep rates at the rock-bottom level for a long period of time, bond yields rose as Powell did not indicate any increase in Treasury purchases, as some expected, quoted on CNBC. The benchmark U.S.- treasury yield rose to 0.69% on Sep 16 from 0.67% recorded on Sep 11.

In the Fed’s latest projections, core inflation is expected to stay low and not reach the Fed’s 2% target until 2023. The labor market is expected to improve to the point where unemployment is likely to be at 4% in 2023, falling short of the longer run rate of 4.1%.

Unemployment rate for 2021 and 2022 are likely to be 5.5% and 4.6%, respectively. Thankfully, both figures came below the June projections of 6.5% and 5.5%, respectively. Real GDP growth is expected to be 4% in 2021, 3% in 2022 and 2.5% in 2023. GDP growth rate projections, however, came below the June projections of 5% for 2021 and 3.5% for 2022.

How to Play the Guidance?

We all know that lower rates for longer mean gains in equities, especially if there is less coronavirus-related hospitalization and stronger vaccine hopes. Most recently, biotech company Eli Lilly and Company LLY saidits antibody therapy has been found to lower SARS-CoV-2 viral load in newly infected patients as well as lessen hospitalisation risk.

The news of AstraZeneca’s AZN resumption of its phase 3 trial of its COVID-19 vaccine, one of thee prime candidates in the vaccine race, should also keep markets charged-up. But then, job less claims have been rising in recent weeks, which is a concerning factor.

Against this backdrop, investors can find the below-mentioned ETF areas gainful in the near term.

High-Dividend – Vanguard High Dividend Yield ETF (VYM)

Many investors may land on high dividend-paying stocks and ETFs. The underlying FTSE High Dividend Yield Index of the fund consists of common stocks of companies which pay dividends that are generally higher than average. The Zacks Rank #2 (Buy) fund yields 3.54% annually and charges 6 bps in fees.

Convertible Bonds – SPDR Bloomberg Barclays Convertible Securities ETF (CWB)

Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. This allows investors the potential to play both sides of a company — debt and equity — in a single security, offering a lower risk choice. The underlying Bloomberg Barclays US Convertible Liquid Bond Index is designed to represent the market of U.S. convertible securities. The fund yields 2.48% annually and charges 40 bps in fees (read: Convertible Bond ETFs: A Pandemic Winner).

Small-Caps – iShares Russell 2000 ETF (IWM)

Low rates are great for small-cap stocks especially as the section is mainly cash-strapped. Moreover, signs of economic recovery would favor this otherwise beaten-down zone. The fund IWM yields 1.31% annually and charges 19 bps in fees (read: Beaten-Down, Small-Cap ETFs Start Rallying: Here's Why).

Low-Volatility – iShares MSCI USA Min Vol Factor ETF (USMV)

Though markets remained more-or-less steady in recent months,“there is still some caution in markets because U.S. virus numbers appear to be picking up again in some states,” said Seema Shah, chief strategist at Principal Global Investors, as quoted on Reuters. With this, opportunities for low-volatility ETFs remain alive, no matter what high stocks and ETFs hit. USMV charges 15 bps in fees and yields about 1.98% annually (read: Why Is This the Right Time to Invest in Low-Volatility ETFs?).

Dividend Growth – Vanguard Dividend Appreciation ETF (VIG)

The underlying NASDAQ US Dividend Achievers Select Index of the fund consists of common stocks of companies that have a record of increasing dividends over time. Thus, the fund calls for a quality approach. The Zacks Rank #2 product yields 1.71% annually.

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AstraZeneca PLC (AZN): Free Stock Analysis Report

Eli Lilly and Company (LLY): Free Stock Analysis Report

iShares Russell 2000 ETF (IWM): ETF Research Reports

iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports

Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports

Vanguard High Dividend Yield ETF (VYM): ETF Research Reports

SPDR Bloomberg Barclays Convertible Securities ETF (CWB): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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