The Fed shocked the markets last week with their decision to not taper QE levels at all. Many investors were looking for at least $10 billion in reductions per month, so holding off yet again was a bit of a surprise.
This lack of tapering, along with some backtracking from Bernanke on bond buying reductions this year, had a huge impact on markets. Stocks soared while Treasury bond yields slumped following this news, leading some to believe that a new bull market may be at hand, assuming that D.C. can get their act together.
The Biggest Winner from the Taper
Speculation about the taper has had a horrendous impact on a few key market segments. Those that are sensitive to changes in rates along with emerging markets have been the biggest hit over the past few months as more investors accepted a tapering fate.
However, now that the taper has been put on hold, some of these segments could be interesting picks for the medium term. These could rebound as investors embrace a risk on mentality and look to solid dividend payers in some beaten down segments as great value opportunities over the next few weeks (see 3 ETF Winners from the ‘No Taper’ Shocker).
Below, we highlight a few of our favorite picks in these now well-positioned corners of the market, any of which could make for an interesting short-term addition for those seeking some additional income to close out the year:
Easily one of the most impacted sectors by the Fed’s policies lately has been emerging markets. These were struggling under significant outflows and declining confidence levels as investors pulled out capital from these volatile nations.
With the Fed holding off on the taper though, we could see a more sluggish dollar and a bit more of a risk-on attitude in the marketplace over the next few weeks. Should this be the case, emerging markets with higher payouts will definitely be top picks, and seem poised to ride a rebound higher.
One easy way to play this trend is with the SPDR S&P Emerging Markets Dividend ETF (EDIV). This product follows the S&P Emerging Markets Dividend Opportunities Index, holding about 130 stocks in its basket (read Have You Overlooked These Dividend ETFs?).
The fund is relatively well spread out across sectors, though financials, utilities, and materials all make up at least 17% of assets. Meanwhile, from a country look, Brazil (22%), China (13.4%), and Taiwan (12.8%) take the top three spots.
The fund has come back a bit in recent trading sessions following the taper news, while its 30-Day SEC yield of 6.3% represents a great income play for investors in the short term.
Concerns were starting to build that the Fed’s policies would derail the budding recovery in the real estate market. After all, rising rates were starting to dull the appeal of this corner of the investing world, but with a lack of tapering, there is now fresh hope.
This is also true in the international real estate sphere as companies in this segment were hurt not only by the income side of the Fed trade, but by a stronger dollar and declining global flows too. Should these reverse, it could lead to some very solid trading in the real estate market over the next few weeks.
One way to play this is with the SPDR DJ Wilshire Global Real Estate ETF (RWO), an ETF that follows companies engaged in real estate operations around the globe. This is done by tracking the Dow Jones Global Select Real Estate Securities Index, a benchmark that gives us a fund with about 200 stocks in its basket (see all the Real Estate ETFs here).
The focus of this product is on the U.S. market which makes up roughly half the portfolio, while Japanese (10.7%), and Australian (6.7%) companies round out the top three. In terms of sectors, there is a pretty solid mix with Real Estate Operating Companies (16.9%), taking the top spot, followed by Regional Malls (15.7%), and Office (10.6%).
This ETF has really come on strong in the past few weeks, much like the rest of the real estate space. The fund has actually added about 4.6% in the past month, while its 30-Day SEC yield comes in just below 3%.
Master Limited Partnerships (MLPs) are another yield play that could be heavily impacted by the Fed’s decision. These firms were more stable than many of the others on the list, but they have also slumped in the weeks leading up to the crucial meeting.
And now, much like real estate, investors will be looking for higher income levels outside of the traditional bond sources, leading to more positive trading for MLPs. Plus, given the volatility in the broader market, these securities could be better picks for investors wanting lower risk choices at this time.
While there are a number of options in this corner of the market, one that offers an interesting combination of yield and exposure to the space is the Yorkville High Income MLP ETF (YMLP). The fund follows the Solactive High Income MLP Index, which is a benchmark of about 25 securities that are high yielders in the MLP space (See all the MLP ETFs here).
Exploration & Production companies make up about two-fifths of the portfolio, while marine transportation and downstream both account for 20% of the ETF as well. No single security makes up more than 6% of the fund though, so concentration risks aren’t much of an issue here.
Although the product has only added a bit in the wake of the ‘no taper’ announcement, it could be well protected in the months ahead should the QE program reductions remain off the table. Plus, with a 30-Day SEC Yield of 7.7%, the real focus of this product is income anyway (also read Buy These 3 ETFs for Excellent Dividend Growth).
While the lack of a taper might have been good news for broad markets, its impact was really felt in dividend, yield sensitive, and emerging market segments. These corners were crushed as taper talk intensified in the summer, and they could all see a relief rally if the taper is put on hold for a little longer.
Just remember that eventually the taper is coming and these sectors could be in for some trouble, much like they were in the summer. But until then, these could be some rebounding segments that pay a great yield and may see a solid level of capital appreciation over the next few months as well.
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