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ETFs to Gain/Lose as Fed Rate Cut Less Likely

Sanghamitra Saha

The Fed is meeting today. The central bank slashed rates by 25 bps in July. President Trump has called for a “big” drop in interest rates this time also. Last week, Trump demanded zero or negative interest rates, following the rollout of the European Central Bank’s new round of stimulus. Several market watchers too are betting big on a rate cut this month (read: ETFs to Gain & Lose as ECB Starts QE, Cuts Rates).

However, at the current level, according to CME FedWatch tool, there is a 65.8% chance of a 25-bp rate cut in the September meeting, down from 92.3% probability noticed a week ago. This clearly suggests that bets over rate cuts have fallen lately.

Why?

The U.S. economy is still better-positioned in the global market. Though the U.S. GDP growth was revised down in the second quarter to 2% (from 2.1% rate reported earlier) hurt by softer business investment and manufacturing, the growth rate is still decent when compared with other developed economies. With consumer spending making up about 70% of the U.S. economy, a near 19-year high consumer confidence should drive the economy ahead.

Also, investors should also note that while U.S. manufacturing and housing data point toward a slowdown early in the third quarter, strong consumer spending has alleviated concerns about a recession. “While other parts of the economy may show some weakening, consumers have remained confident and willing to spend,” said Lynn Franco, senior director of economic indicators at the Conference Board (read: ETFs to Buy as Americans' Confidence Nears 19-Year High).

Per economists, the U.S. economy has changed itself from being a manufacturing-driven one to services-oriented one. The ISM Non-Manufacturing PMI for the United States rose to 56.4 in August 2019, rebounding from a three-year low of 53.7 in the previous month and beating market consensus of 54. So, near-term recession fears in the United States looks exaggerated (read: U.S. Manufacturing Shrinks: Sector ETFs That Grew).

Also, there will be U.S.-China trade talks in October. China already exempted import tariffs on more than a dozen U.S. goods for the first time since the trade war started early last year. Easing trade tensions should give the Fed some confidence in retaining the rates.

ETFs to Gain

Against this backdrop, below we highlight a few ETFs that should gain/lose in the coming days if the Fed doesn’t go for a rate cut in September.

Likely Gainers

Invesco DB US Dollar Index Bullish Fund (UUP)

A slightly-hawkish Fed and extremely-dovish global central banks should strengthen the currency and boost the fund (read: Dollar Hits 2019 High: More Gains Ahead for ETFs?).

Vanguard High Dividend Yield ETF VYM

If the Fed stays put, bond yields should rise. In such a scenario, a fund offering relatively higher dividend can be played to enjoy some steady current income. VYM has a Zacks Rank #2 (Buy) and yields 2.99% annually. Dividends or regular current income could save investors even if there is any capital loss.

Likely Losers

PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund (ZROZ)

U.S. government bond yields recorded their biggest weekly advance in more than six years amid trade hopes and easing economic tensions, per Wall Street Journal. The benchmark U.S. treasury bond yield touched 1.90% on Sep 13, from 1.47% from the start of the month, causing long-term bonds to underperform.

Though the Saudi oilfield attack during the weekend caused a safe-haven rally and subdued yields, the move is short-term in nature. A long-term impact of a hawkish Fed should be underperformance in the bond market (read: Leveraged Oil & Energy ETFs to Play on Saudi Attack).

SPDR Gold Shares (GLD)

Gold also underperforms if the U.S. dollar gains. This safe-haven asset is currently a beneficiary of Saudi attack, but a hawkish Fed and sooner-than-expected resumption in Saudi oil production may dampen the lure of the metal.

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PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ): ETF Research Reports
 
Invesco DB US Dollar Index Bullish Fund (UUP): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
 
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