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ETF Winners Amid Half-Hearted Response to Fed's Rate Cut

Sanghamitra Saha

The Fed implemented this year’s second rate cut in its September meeting. The central bank slashed the benchmark interest rates by a modest 25 bps to 1.75-2.00%, in order to keep slowdown fears and impact of rising trade tensions at bay. The U.S. central bank had enacted its last rate cut in July.

The Fed officials also kept chances of another rate cut alive this year in case the economy deteriorates further. However, President Trump criticized the central bank for not being too dovish. Before the meet, the President had called for a “big” drop in interest rates. He had asked for negative rates, in line with the ECB’s move.

The Fed’s move was priced-in to some extent. There have been moderate gains in the SPDR S&P 500 ETF SPY (up 0.06%) and the SPDR Dow Jones Industrial Average ETF DIA (up 0.15%). However, Nasdaq-100-based ETF Invesco QQQ Trust QQQ was down 0.4% on Sep 18.

Mixed Views Among Fed Officials

The latest rate-cut decision and views on the need for further cuts did not come in unison. Seven members, including Fed chair Powell, voted for the Sep 18th decision. While two members wanted to retain rates, one sought a deeper cut. The officials had a divided outlook about the economy.

Fed’s Future Rate Outlook Slightly Hawkish

The Fed expects the economy to remain steady and inflation to hover around its 2% target. Powell anticipates another small cut or two could be warranted in the future. Nonetheless, the need for lowering rates further in the upcoming months seems unnecessary, at this moment.

Notably, unemployment level is at a 50-year low and there has been a rise in wages. Nevertheless, the continuing trade tensions between the United States and China have hurt business investment and the manufacturing sector.

The Fed raised its median forecast for 2019 real GDP growth from 2.1% in June to 2.2% and from 1.8% to 1.9% for 2021 but maintained the 2020 growth forecast at 2%. PCE inflation expectations were maintained at 1.5%, 1.9% and 2% for 2019, 2020 and 2021, respectively.

However, Federal funds rate projections have been lowered from 2.4%, 2.1% and 2.4%, to 1.9%, 1.9% and 2.1%, for 2019, 2020 and 2021, respectively.

Against this backdrop, below we highlight a few ETFs that emerged as winners post the Fed meet.

ETF Winners

Utilities ETF Vanguard VPU – Up 0.54% on Sep 18

Utilities is a rate-sensitive sector and tends to perform well in a declining-rate environment. The underlying MSCI US Investable Market Utilities 25/50 Index of the fund comprises stocks of large-, mid-, and small-size U.S. companies within the utilities sector. It yields 2.75% annually.

YieldShares High Income ETF YYY – Up 0.39%

As the Fed cut rates, yields are expected to remain lower in the coming days. This may put YYY in a brighter spot. The underlying ISE High Income Index of the fund comprises 30 closed-end funds (CEFs) ranked highest overall by the ISE in three criteria: fund yield, discount to net asset value and liquidity. The fund yields 8.73% annually (read: High-Yield ETFs at a 52-Week High Ahead of Fed's Decision).

Dynamic Building & Construction Invesco ETF PKB – Up 0.22%

Construction stocks also excel in a low-rate environment. The underlying Dynamic Building & Construction Intellidex Index comprises U.S. building and construction company stocks. The Index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors.

PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund ZROZ – Up 0.64%

The benchmark treasury bond yields shrunk one basis point to 1.80% on Sep 18 from the day before. Low yields boost bond funds like ZROZ (read: Safe Haven ETFs to Grab Amid Middle East Tensions).

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YieldShares High Income ETF (YYY): ETF Research Reports
SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ): ETF Research Reports
Vanguard Utilities ETF (VPU): ETF Research Reports
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
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Zacks Investment Research
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