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Fed to Hike in December? Buy Quality ETFs

Some investors are rotating out of earlier high flying technology stocks into cheap emerging markets.

The latest Fed minutes hinted at a divided Fed. While some officials have faith in the steadily growing economy, subdued inflation left some officials cautious. The officials were divided on the nature the deterrents to inflation which some felt are transitory while others believed are persistent (read: US PCE Inflation Still Weak: Avoid TIPS ETFs).

 The Fed's preferred gauge currently represents a rise of only about 1.4% against a goal of 2%. Still, many Fed policymakers favor another rate hike in December if the medium-term outlook stays more-or-less same.

Fed policy makers expect third-quarter economic growth to be hurt by the catastrophes like Hurricane Harvey and Irma. However, they also believe that the economy may ricochet from the fourth quarter thanks to the pickup in activity in the affected areas. The hurricane-recovery efforts will likely translate into higher growth in the fourth quarter.

Moreover, some policy makers believe that the long-accommodative monetary policy may be adding to a financial bubble. In a nutshell, the latest minutes can be considered as neither too hawkish nor too dovish. Fed funds once again showed a 77% chance of a 25-bp rate hike in the final month of the year after the release of the minutes (read: Best ETF Strategies for a Hawkish Fed).

Responding to the minutes, PowerShares DB US Dollar Bullish ETF UUP was down about 0.3% on Oct 11. However, the fund gained about 0.04% after hours. SPDR Gold Shares GLD, which tracks the gold bullion, gained about 0.3% on Oct 11 and added 0.01% after the market closed. Broader U.S. markets are broadly steady.

What Should Be Investors’ Stance Now?

Many may consider this minutes as a dovish one. Yet, the possibility of one more rate hike cannot be ruled out. This means that a considerable amount of uncertainty related to Fed moves is impending. So, it is better to stick to quality ETF picks. After all, progress related to Trump’s tax plan, geopolitical risks and behavior of Q3 corporate earnings — all point to the necessity of quality picks right now.

ETF Picks

Given this, we highlight a few ETF options that are relatively safe and can help investors in the upcoming trading sessions that are likely to be riddled with Fed, Trump, overvaluation and earnings risks (read: 4 Bargain ETFs in a Pricey Market).

 FlexShares Quality Dividend Index ETF QDF

The fund looks to provide exposure to the growth potential of U.S. securities while offering dividends. The fund yields about 2.80% annually (as of Oct 11, 2017) (read: Prepare for Uncertainty with These "Quality" ETFs).

VanEck Vectors Morningstar Wide Moat ETF MOAT

The fund follows an index which tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund also calls for quality exposure.

WisdomTree U.S. Quality Dividend Growth Fund DGRW

The fund gives exposure to both growth and quality factors. The fund yields about 2.65% annually (as of Oct 6, 2017) and charges about 28 bps in fees. From a sector look, the fund has high exposure to Information Technology, Health Care and Industrials with about 21.1%, 20.8% and 20.1% allocation, respectively.


This fund holds stocks that have a combination of value, low volatility and quality factor strategies. The fund charges 15 bps per year and yields about 1.91% annually. Information Technology, Health Care and Financials are the top three sectors of the fund.

PowerShares S&P 500 High Quality Portfolio SPHQ

SPHQ tracks the S&P 500 High Quality Rankings Index which comprises S&P 500 stocks that have the highest quality score. The scores are based on long-term growth and stability of a company’s earnings and dividends, using records of the most recent 10 years. The fund charges 29 bps in fees and yields 1.88% annually.  

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GOLD (LONDON P (GLD): ETF Research Reports
PWRSH-DB US$ BU (UUP): ETF Research Reports
WISTR-US QD (DGRW): ETF Research Reports
SPDR-MSCI US SF (QUS): ETF Research Reports
PWRSH-SP5 HQ (SPHQ): ETF Research Reports
VANECK-MS WD MT (MOAT): ETF Research Reports
FLEXS-QLTY DIV (QDF): ETF Research Reports
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