As widely expected, the Fed held interest rates steady at near-zero level in its latest meeting. U.S. interest rates have been this low since March 2020. The Fed will also continue its bond purchases and other lending and liquidity programs. However, the latest Fed decision came with a sombre outlook on the coronavirus-stricken economy.
The Fed noted that the course of economic recovery will depend on the progression of the virus. The ongoing public health crisis will continue to hurt economic activity, labor market and inflation in the near term.
“Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.” But “weaker demand and significantly lower oil prices are holding down consumer price inflation,” noted the Federal Reserve.
Post meeting, the benchmark 10-year U.S. treasury yield dived to 0.58% on Jul 29 (from 0.69% noted on Jul 1) while the two-year yield fell to a meager 0.12% (from 0.17% recorded at the start of the month). No wonder, investors will turn yield-hungry. Against this low-rate environment, investors can bet on the following ETFs for current income and likely capital appreciation.
Utilities – Vanguard Utilities ETF VPU
Utilities is a rate-sensitive sector, which tends to perform well in a declining-rate environment. The sector is high-yielding as well as non-cyclical in nature. The underlying MSCI US Investable Market Utilities 25/50 Index of the fund comprises stocks of large, mid, and small-size U.S. companies within the utilities sector. It yields 3.22% annually.
Dividend Growth – Vanguard Dividend Appreciation ETF (VIG)
The underlying NASDAQ US Dividend Achievers Select Index of the fund consists of common stocks of companies that have a record of increasing dividends over time. Thus, the fund calls for a quality approach. The Zacks Rank #2 (Buy) product yields 1.81% annually (read: Dividend Growth ETFs To The Rescue Amid Rising Coronavirus Cases).
High-Dividend – Vanguard High Dividend Yield ETF (VYM)
Many investors may land on high dividend-paying stocks and ETFs. The underlying FTSE High Dividend Yield Index of the fund consists of common stocks of companies which pay dividends that are generally higher than average. The fund yields 3.63% annually and charges 6 bps in fees.
Convertible Bonds – SPDR Bloomberg Barclays (LON:BARC) Convertible Securities ETF (CWB)
Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The underlying Bloomberg Barclays US Convertible Liquid Bond Index is designed to represent the market of U.S. convertible securities. The fund yields 2.67% annually and charges 40 bps in fees (read: Convertible Bond ETFs: A Pandemic Winner).
Corporate Bonds – PIMCO Investment Grade Corporate Bond Index ETF CORP
The underlying ICE (NYSE:ICE) BofAML US Corporate Index is an unmanaged index comprising U.S. dollar denominated investment grade, fixed-rate corporate debt securities publicly issued in the U.S. domestic market with at least one-year remaining term to final maturity and at least$250 million outstanding. These bonds are highly rated and the Fed is also buying investment grade corporate bonds. The fund yields 3.01% annually and charges 20 bps in fees (read: All-Out Fed Support: Buy Highly-Rated Corporate Bond ETFs).
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Vanguard Utilities ETF (VPU): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
PIMCO Investment Grade Corporate Bond Index ETF (CORP): ETF Research Reports
SPDR Bloomberg Barclays Convertible Securities ETF (CWB): ETF Research Reports
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