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Fed Cuts Rates, Signals Pause: Trick or Treat for ETFs?

Sanghamitra Saha

As expected, the Fed implemented this year’s third rate cut since July in its October meeting. The central bank slashed the benchmark interest rates by a modest 25 bps to 1.50-1.75%, in order to keep slowdown fears at bay.

The move sent the S&P 500 to a record high for the second time this week. The benchmark U.S. treasury yield fell to 1.78% on Oct 30 from 1.84% recorded the day earlier while short-term, two-year yield dropped to 1.61% from 1.64% seen the previous day. iShares 20+ Year Treasury Bond ETF TLT added 1.5% on Oct 30.

Despite Rate Cut Treat, Fed Tricks With Guidance

The Fed indicated a pause in the rate cut cycle in the near future as “monetary policy is in a good place.” The Fed sees “the current stance of policy as likely to remain appropriate”. The Fed indicated that the rates will likely stay the same unless the economic condition worsens materially. With the phase one U.S.-China trade deal on its way, any further rate cut is less likely. But then, there will be no rate hike anytime soon either.

Why Wall Street May Hit the Road to Start 2020?

Many market analysts see a big stock market selloff in the near future, per an article published onInvestopedia. Peter Cecchini of Cantor Fitzgerald expects the S&P 500 Index to be at 2,500 by early 2020, marking a decline of about 18% by early next year. Albert Edwards of Societe Generale also sees stock prices rushing faster than earnings, which definitely speaks off overvaluation concerns.

The recent rally in Wall Street can be attributed to further Fed rate cut bets, in the absence of which, the market is likely to lose momentum. Investors should note that despite easy money policies by the Fed this year, most of the economic data points came in weaker in September, be it manufacturing, retail or existing home sales. Consumer confidence came in at fourth-month low in October. Business spending is also on a downhill ride.

Although economic activity (+1.9%) in the United States has beaten the expectations (+1.6%) in the third quarter, the momentum slowed from the second quarter (+2%). It is also way behind than the Trump administration's forecast of hitting 3% economic growth annually. In this scenario, we can say that only a U.S.-China trade truce could save corporate earnings, the economy and Wall Street.

Markets Rallied Following Fed Rate Cut, Q3 GDP Data Release

Wall Street rallied on Oct 30 due to better-than-expected U.S. GDP data release and a Fed rate cut. Growth ETFs like iShares Russell Top 200 Growth ETF IWY (up 0.54%) and Direxion Russell 1000 Growth Over Value ETF RWGV (up 0.81%), tech ETFs like SPDR S&P Software & Services ETF XSW (up 1.44%) and ETFMG Prime Cyber Security ETF HACK (up 2.1%), and emerging market ETFs like iShares MSCI Emerging Markets ETF EEM (up 0.4%) and Invesco DWA Emerging Markets Momentum ETF PIE (up 1.25%) are the some of the examples of rise on the latest Fed move. But the rally may not last long.

ETF Picks

As a result, below we highlight a few ETF options that could stay strong in the coming days if the rally falters.

Vanguard High Dividend Yield Index Fund ETF Shares VYM

A fund offering relatively higher dividend can be played to enjoy some steady current income. VYM has a Zacks Rank #2 (Buy) and yields 3.12% annually. Dividends or regular current income could save investors even if there is any capital loss (read: Dividend ETFs to Invest as Odds for October Fed Rate Cut High).

SPDR Gold Shares GLD

Gold also underperforms if the U.S. dollar gains. But if the U.S. economy suffers ahead, the greenback may lose strength and benefit gold investing. Gold also acts as a safe-haven asset (read: 5 Reasons to Buy Gold ETFs as Price May Touch $2000).

iShares Edge MSCI USA Quality Factor ETF QUAL

The fund gives exposure to stocks as identified through three fundamental variables: return on equity, earnings variability and debt-to-equity. The fund beat the S&P 500 in the past one-month frame and the year-to-date frame, and returned almost similarly in the past six-month frame.

Vanguard International Dividend Appreciation ETF VIGI

Though the Fed may not cut rates ahead, several international economies are practicing ultra-easy monetary policy. There is QE policy in place by the ECB and BoJ. So, international stocks should do well. VIGI focuses on stocks that have both the ability and the commitment to grow their dividends over time, thus offering quality exposure. VIGI has beaten the S&P 500 in the past month and remained almost on par with the key U.S. equity gauge on the year-to-date frame.

IQ U.S. Real Estate Small Cap ETF ROOF

Low levels of rates are great for real estate business. The sector looks bright currently as residential investments recoiled to 5.1% growth in Q3 from a negative 3% in the prior quarter. The fund yields 6.00% annually and has surpassed the S&P 500 this year consistently (see all real estate ETFs here).

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iShares Russell Top 200 Growth ETF (IWY): ETF Research Reports
 
ETFMG Prime Cyber Security ETF (HACK): ETF Research Reports
 
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
 
IQ US Real Estate Small Cap ETF (ROOF): ETF Research Reports
 
SPDR S&P Software & Services ETF (XSW): ETF Research Reports
 
iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports
 
iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
 
Invesco DWA Emerging Markets Momentum ETF (PIE): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
Vanguard International Dividend Appreciation ETF (VIGI): ETF Research Reports
 
Direxion Russell 1000 Growth Over Value ETF (RWGV): ETF Research Reports
 
iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
 
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