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Fed to Not Hike Rates in 2020: ETF Areas to Shine

Sanghamitra Saha

The Federal Reserve stayed put on its interest rate policy on Dec 11, after three rate cuts this year. It also hinted at keeping interest rates unchanged in 2020 unless there is any drastic change in the economic outlook. The central bank has kept the benchmark interest rates at the band of 1.50-1.75%.

Federal funds rate projections made in September have been lowered from 1.9%, 2.1% and 2.4% to 1.6%, 1.9% and 2.1%, for 2020, 2021 and 2022, respectively. PCE inflation and real GDP projections have been maintained. Unemployment rate projections have been lowered from 3.7%, 3.8% and 3.9% to 3.5%, 3.6% and 3.7% for 2020, 2021 and 2022. The Fed believes that the economy is likely “to remain in a very good place."

Against this backdrop, we highlight a few ETFs that could emerge as winners in 2020, if U.S.-China trade relations remain smooth.

Overall U.S. Equities

As rates won’t be hiked next year, incessant cheap money inflows will likely strengthen stocks further. Investors should also note that though there are pockets of weakness, the U.S. economy is better positioned than most developed economies. This should be favorable for stock investing. A partial U.S.-China trade deal (if signed) could add to the strength of the equity market.

However, in a low-rate environment, investors would be more interested in securities that ensure regular current income. Our top pick here is SPDR Dow Jones Industrial Average ETF DIA, which yields 2.04% currently, higher than the benchmark U.S. treasury yield (1.79% as of Dec 11). The fund has a Zacks Rank #1 (Strong Buy).

Also, Dow has underperformed its other two counterparts the S&P 500 and the Nasdaq this year partly because of Boeing’s weakness (Dow’s one of the key holdings). So, 2020 can be a game changer for the index. Low rates can be helpful for industrial stock-heavy Dow index (read: Can Dow ETFs Be a Winner in 2020?).

Apart from this, Industrial Select Sector SPDR Fund XLI ( rank #1), Technology Select Sector SPDR Fund XLK (rank #1) and Consumer Discretionary Select Sector SPDR Fund XLY (rank #2) are good picks (read: What Soft Confidence? 3 ETFs & Stocks for Solid Holiday Buying).

Value Stocks

Wall Street has been rallying in recent weeks and is positioned to rise further on cheap value stocks, if we go by analysts’ comments. In fact, value stocks have gained more than momentum stocks in recent months.Per Bank of America, “Value has never been this cheap vs. Momentum.” Also, after the recent Wall Street rally, it is wise to bet on cheaper stocks, i.e. value stocks. iShares Edge MSCI USA Value Factor ETF VLUE and Vanguard S&P 500 Value ETF VOOV are good bets in this regard (read: Value ETFs & Stocks Offering Real Value: 5 Top Picks).

Emerging Markets

Thanks to a dovish Fed, EM equities should be up for a stellar performance. Investors should note that the Fed has enacted three rate cuts since July, which have weakened the greenback to some extent. Invesco DB US Dollar Index Bullish Fund UUP is down 0.5% in the past three months (as of Dec 11, 2019). Since EM equities tend to perform better in a low-rate and low-dollar environment, EM assets had every reason to outperform.

Asia has the best prospects, according to Bloomberg’s survey of 57 global investors, strategists and traders on their outlook for next year, especially if a trade deal is cut. Stable price growth is expected for the EM space in 2020, per Bloomberg and monetary policies will mostly remain easy. One can thus keep tab on Vanguard FTSE Emerging Markets ETF VWO and iShares Asia 50 ETF AIA (read: Emerging Market ETFs Beating the Broader Market: Here's How).

Dividends

The past decade was especially favorable for dividend ETFs as central banks, including the Fed, have been ultra-dovish. Research shows that dividend stocks often beat their non-dividend paying counterparts over longer periods. So, one can pin hopes on iShares Core High Dividend ETF HDV (yields 3.25% and Rank #2), Vanguard High Dividend Yield ETF VYM (yields 3.05% and Rank #2) and OShares FTSE U.S. Quality Dividend ETF OUSA (yields 2.38% and Rank #1).

Utilities

Utilities stocks perform better in a low-rate environment and thus should do well in 2020. If there is any market crash next year due to U.S. elections and trade uncertainty, utilities stocks will outperform due to their safe status. Further, U.S. utility companies have less exposure to China and thus come across as trade-resilient. This makes Zacks Rank #2 Utilities Select Sector SPDR Fund XLU a good pick. The fund yields 2.96% annually (read: 6 Trade-Proof Sector ETFs to Follow if No Deal is Cracked).