Will the Fed Taper start in November? 7 ETFs to buy

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FFederal Reserve Chairman Jerome Powell said the central bank could start cutting asset purchases as early as November and complete the process by mid-2022. Several officials are even interested in raising interest rates next year.

The announcement of the Fed’s QE cut could come during the policy meeting on 2-3 November. However, Fed Chairman Powell left the door open to a longer wait if needed and stressed that tapering is not directly related to when rates take off.

Investors should note that the Fed has kept interest rates close to zero since last year and bought $ 80 billion in treasury bills and $ 40 billion in mortgage-backed securities each month until that “further substantial progress” is observed on employment and inflation targets.

Inflation is high, which could force the Fed to reduce its QE. The job market has also improved a lot. The US unemployment rate fell to 5.2% in August, well below the April 2020 peak of 14.8%, but still above the 3.5% rate recorded in February 2020, just before the start of the pandemic.

If the Fed begins to cut QE soon and rates rise, there could be some massive selling in the bond market. Against this background, we highlight a few ETFs below that could be winning choices.

Focus on ETFs

Bullish ETF Invesco DB US Dollar Index UUP

The US dollar has strengthened lately against a basket of major currencies as market watchers on the Fed taper talks despite an increase in COVID-19 cases. Additionally, the spread of the Delta variant of COVID-19 is another concern, which could further slow global growth. This appears to be a win-win situation for the greenback, as the global health crisis has yet to dissipate. This fact provides support for safe-haven trades.

iShares US Regional Banks ETF IAT

While regional banks are doing well in a steepening yield curve environment, the IAT is likely to get ahead. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will pay more on loans and pay less on deposits, resulting in a steeper yield curve. wider gap. This will increase net margins and increase bank profits.

iShares Russell 2000 Value ETF IWN

Small cap stocks tend to outperform in a growing domestic economy. Rapid vaccination and deployment of stimuli are great assets for the segment. Focusing on the value spectrum in the small cap segment would be a great idea in the midst of a temper tantrum. Value stocks tend to perform in a rising rate environment. This is especially true given that the IWN fund is heavy on financials – an industry that is a big beneficiary of rising rates.

Invesco BKLN Senior Loan ETF

Senior loans are variable rate instruments and therefore pay a spread over the benchmark rate like LIBOR, which helps to eliminate interest rate risk. This is because when interest rates rise, senior loan coupons increase while the value of bonds decreases, keeping investments stable. Since these loans are issued by companies with a lower credit rating than investment grade, they usually earn returns to offset the risk.

In view of this, senior loans and associated ETFs offer higher yields as well as protection against any rise in interest rates, making them ideal investments. In addition, they carry a lower credit risk than most other assets, with a similar level of return and have low correlations with other asset classes. Therefore, investors can certainly play BKLN, which earns 3.19% per annum.

iShares Floating Rate Bond ETF FLOT

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

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

Vanguard High Dividend Yield VYM ETF

With the 10-year Treasury yield rising (1.32% as of September 22, 2021), income-loving investors would certainly be looking for other better options. VYM is currently reporting 2.90%. In addition, the dividend distribution scenario has also improved within US companies.

iShares Preferred And Income Securities ETF PFF

Preferred securities as an asset class are hybrid securities, having characteristics of both equity and fixed income securities. These are classified as shares with a fixed dividend rate on their nominal value (nominal value). The fund is earning 4.45% per annum, which is quite a bit higher than benchmark US Treasuries as of September 22.

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Invesco DB US Dollar Index Bull (UUP) ETF: ETF Research Reports

IShares Russell 2000 Value ETF (IWN): ETF Research Reports

ETF Vanguard High Dividend Yield (VYM): ETF Research Reports

IShares U.S. Regional Banks (IAT) ETFs: ETF Research Reports

IShares Preferred and Income Securities (PFF) ETF: ETF Research Reports

IShares Floating Rate Bond (FLOT) ETF: ETF Research Reports

Invesco Senior Loan ETFs (BKLN): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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