U.S. Markets closed

Fed Taper to Start in November? 7 ETFs to Buy

·4 min read

Federal Reserve Chair Jerome Powell said the central bank could start scaling back asset purchases as soon as November and finish the process by mid-2022. Several officials are even interested to hike interest rates next year.

The announcement of the Fed QE taper may come in the policy gathering on Nov 2-3. However, the Fed chair Powell left the door open to waiting longer should the need be and stressed that tapering is not directly corelated with the timing of rate liftoff.

Investors should note that the Fed held interest rates near zero since last year and have been buying $80 billion in Treasuries and $40 billion in mortgage-backed securities every month until “substantial further progress” is seen on employment and inflation goals.

Inflation is running high, which may compel the Fed to taper QE. Jobs market has also improved a lot. The U.S. unemployment rate dropped to 5.2% in August, well below the April 2020 peak of 14.8%, but still higher than the 3.5% rate recorded in February 2020, just before the pandemic started.

If the Fed starts the QE taper soon and rates rise, there could be sell-offs in the bond market. Against this backdrop, below we highlight a few ETFs that could be winning picks.

ETFs in Focus

Invesco DB US Dollar Index Bullish ETF UUP

The U.S. dollar strengthened lately versus a basket of major currencies as market watchers on Fed taper talks despite a surge in COVID-19 cases. Plus, the spread of the Delta variant of COVID-19 is another concern, which may slow down global growth further. It appears to be a win-win situation for the greenback as the global health crisis has not dissipated yet. This fact provides support to the safe-haven trades.

iShares U.S. Regional Banks ETF IAT

As regional banks fare well in a steepening yield curve environment, IAT has chances of gaining ahead. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.

iShares Russell 2000 Value ETF IWN

Small-caps stocks tend to outperform in a growing domestic economy. Rapid vaccination and stimulus rollout are great positives for the segment. Honing in on the value spectrum in the small-cap segment would be a great idea amid taper tantrum. Value stocks tend to perform in a rising rate environment. This is especially true given the fund IWN is heavy on Financials – a sector that is a great beneficiary of rising rates.

Invesco Senior Loan ETF BKLN

Senior loans are floating rate instruments and thus pay a spread over the benchmark rate like LIBOR, which help in eliminating interest rate risk. This is because when interest rate rises, coupons on senior loans increase while the value of the bonds decline, keeping investments stable. Since these loans are issued by companies with below investment grade credit ratings, they usually pay yields to compensate for the risk.

Given this, senior loans and the related ETFs offer higher yields along with protection against any interest rate rise, making these ideal investments. Further, they carry lower credit risk than most other assets, with a similar level of yield and have low correlations with the other asset classes. Hence, investors can definitely play BKLN, which yields 3.19% annually.

iShares Floating Rate Bond ETF FLOT

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.

Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. FLOT has an effective duration of 0.10 years and thus presents minimal interest rate risks.

Vanguard High Dividend Yield ETF VYM

With the 10-year Treasury yield (1.32% as on Sep 22, 2021) rising, income-loving investors would definitely look for other better options. VYM yields 2.90% currently. Plus, the dividend payout scenario has also improved within corporate America.

iShares Preferred And Income Securities ETF PFF

Preferred securities as an asset class are hybrid securities, having traits of both equity shares as well as fixed income securities. These are classified as shares having a fixed rate of dividend on their face value (par value). The fund yields 4.45% annually, which is pretty higher as compared with the benchmark U.S. treasuries as of Sep 22.



Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
iShares Russell 2000 Value ETF (IWN): ETF Research Reports
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
iShares U.S. Regional Banks ETF (IAT): ETF Research Reports
iShares Preferred and Income Securities ETF (PFF): ETF Research Reports
iShares Floating Rate Bond ETF (FLOT): ETF Research Reports
Invesco Senior Loan ETF (BKLN): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research