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ETF Winners & Losers Post Partly Dovish Fed Meet

Sanghamitra Saha
For ETF investors who are bearish on Treasuries for the near term, these products could make an interesting choice.

As widely expected, the Fed effected the third-rate hike of the year in its December meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 1.25-1.50%, confirming the U.S. economy’s growth momentum and the labor market’s well-being.  The Fed is also normalizing its $4.2-trillion balance sheet and intends to gradually speed up the process.

For 2018, the Fed penciled three more rate hikes which will be undertaken by the chairmanship of Jerome Powel. The Fed has now forecast U.S. economic growth of 2.5% for 2017, up from 2.4% projected in the September meeting. The GDP guidance for 2018 was also beefed up from 2.1% to 2.5%. The PCE inflation guidance was upped to 1.7% by the end of this year, from 1.6% guided in September. However, the inflation guidance for 2018 remains the same at 1.9%. Unemployment guidance was also lowered for this year and the next.

Market behavior

Post Fed rate hike, funds on key equity gauges likeSPDR S&P 500 ETF SPY) lost about 0.01% on Dec 13, SPDR Dow Jones Industrial Average ETF DIA added about 0.4% and PowerShares QQQ ETF QQQ gained about 0.2%, respectively, on Dec 13, 2017. iShares 20+ Year Treasury Bond ETF (TLT) gained about 0.8% despite the rate hike while global fund iShares MSCI ACWI ETF ACWI reached an all-time high having added about 0.2% on Dec 13.

Why Such Market Behavior?

First of all, this December hike was too obvious to leave any impact on the broader investing world. So, the Fed activity sent no shockwave as it was already baked in the asset classes. Now, with Fed officials sticking to their outlook for three more rate hikes in 2018 despite speeding economic growth, there is no spark in the guidance either. In fact, an air of dovishness was prevalent.

The median Fed funds rate for this year and the next were unchanged. As a result, yield on 10-year U.S. Treasuries slipped to 2.36% on Dec 13, from 2.40% noted the day earlier.

Surprise ETF Winners

Gold

After faring better for most part of the first nine of months of 2017, the metal started to falter from the fourth quarter. An upbeat global economy and hopes of tax reform in the United States marred the safe haven demand of the metal. Plus, heightened prospects of the Fed rate hike boosted yields and the greenback. This in turn weighed on the non-interest-bearing asset like gold. However, post Fed meeting, gold gained its strength and SPDR Gold Shares GLD added about 0.9% on Dec 13.

Rate Sensitive Sectors

Needless to say, sectors that perform well in a low interest rate environment and offer higher yields, gained on Dec 13. Since housing and safe sector utility are rate-sensitive, SPDR S&P Homebuilders ETF XHB and Vanguard Utilities ETF VPU added about 0.4% and 0.3%, respectively (read: Housing ETFs to Buy in 2018).

Multi-Asset ETFs

Multi-asset ETFs like iShares Morningstar Multi-Asset Income IYLD are great picks in times of uncertainty and for investors who are in search of higher current income. The fund added about 0.3% on Dec 13 and yields about 4.54% annually. This fund offers about 70% exposure to U.S. securities while international products occupy the rest (read: Multi-Asset ETFs for Uncertain Markets).

Losers  

Financials

Sectors that flourish in a rising rate environment, skid post Fed meeting. Financial Select Sector SPDR ETF XLF lost more than 1.2% on Dec 13 (read: ETFs to Gain/Lose if Fed Turns Hawkish for 2018).

Preferred Stocks  

Another instrument, preferred stocks, which saves investors from rising rate threats, also underperformed. iShares US Preferred Stock ETF PFF lost about 0.3% on Dec 13.

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GOLD (LONDON P (GLD): ETF Research Reports
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
VIPERS-UTIL (VPU): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
 
ISHARS-MO MA (IYLD): ETF Research Reports
 
ISHARS-US PFD S (PFF): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
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