A Positive-But-Cautious Fed Meet: Buy These ETFs

As expected, the Fed stayed put in its July meeting and kept the short-term interest rates steady in the 0.25–0.50% band. However, the Fed changed its assessment on the health of the U.S. economy.

Contrary to the June meeting, this time, the Fed was far more confident about the economy. Definitely, kudos go to the June job report as U.S. hiring came in stronger-than-expected, shrugging off all fears about loss of momentum in the labor market (read: ETFs to Buy After Strong Jobs Report).

The month of June saw the addition of 287,000 jobs – the highest in eight months and also way above an 180,000 rise expected by analysts. This was achieved after back-to-back months of weak job growth. Especially, after the shockingly low job growth of 11,000 in May that scared market watchers, the June job data was a huge relief.

The Fed noted in its latest meeting that “near-term risks to the outlook have diminished” and also expressed confidence in rising household spending.

What Kept Fed from Policy Tightening?

Amid the new-found optimism, the Fed indicated that inflation in the economy has stalled and is likely to stay subdued in the near term. However, it would pick up in the medium term as the prior declines in energy prices disperse and the labor market gains more traction. Apart from inflation issues, global economic conditions especially after Brexit, are being considered by the Fed. Also, muted business investment is a cause of concern.

Is September Hike in the Cards?

Though the Fed continues to pay heed to these deterrents, threats appear to be subsiding given the recent global market rally and a few experts’ comments like “the U.K. economy is simply not big enough for even a devalued British pound to have a large direct impact on global trade.”

Also, in mid-July, Atlanta Fed President Dennis Lockhart pointed to a “quite orderly” movement in the markets and said that “the financial market turbulence we’ve seen does not seem to have caused direct harm to the country’s economy,” going by an article published in the Wall Street Journal.

So, with this sort of positive-but-cautious view, one can expect that the Fed kept the door open for a September hike. But then, some market watchers believe that the economy needs to produce upbeat data steadily in the coming months for a September hike.

Also, the markets may turn volatile prior to the November presidential election which lessens the chance of a hike to certain extent. Traders now view a 20.9% chance of a September hike and a 49.5% probability of just one hike by the end of 2016. The Fed last opted for a hike in December, almost after a decade.

Market Impact

Though the world was almost sure about a dovish Fed meeting in July, only a little more-than-expected optimism in the tone led the stock market to react a little negatively in fear of gradual ceases in cheap dollar inflows. Among the top ETFs, investors saw SPY (NYSE:SPY) lost about 0.12% and DIA shed about 0.02%. however, tech-savvy QQQ gained about 0.7% on recently released impressive tech earnings.

Some subtle moves in various markets and asset classes were also noticed. U.S. sovereign bond prices recorded gains on Fed meet while the yield on the 10-year U.S. Treasury note slipped to as low as 1.52%. The U.S. dollar was a loser following a dovish Fed, with PowerShares DB US Dollar Bullish Fund UUP shedding over 0.4%.

ETFs to Buy

Below we discuss a few ETFs which could be great destinations ahead.

Sprott Gold Miners Exchange Traded Fund SGDM

As the dollar dipped, gold prices rose with SPDR Gold Shares (NYSE:GLD) (LAGOS:GLD) adding over 1.6% on July 27. Though gold is on a tear lately, we suggest playing gold mining ETFs likeSGDM. This is because if rate hike bet strengthens, gold will eventually fall. But gold mining as a sector is quite strong now with the Zacks Industry Rank in top 3% at the time of writing. Also, many of the fund’s underlying stocks presently have a Zacks Rank #1 (Strong Buy) (read: Gold ETF Investing: 10 Facts Investors Need to Know).

iShares S&P SmallCap 600 Index ETF IJR

As the U.S. economy is taking root, small-cap stocks could be great picks as this capitalization is more exposed to domestic stocks.

First Trust NASDAQ Technology Dividend Index Fund TDIV

With an improving economy, a cyclical sector like technology demands a look. Also, the lure of the fund in focus lies in dividend yield – a prerequisite in the present extremely low-yield environment. TDIV yields around 2.73% annually.

Vanguard Long-Term Corporate Bond ETF VCLT

Investors may flock to long-term bond ETFs for higher current income amid extremely low levels of yields. Also, even if the Fed acts in September, the gyrations will be more in the short-end of the curve. U.S. Treasuries appear a bit overvalued at this point of time. So, a look at the investment-grade corporate bond ETFs like VCLT (yielding over 4%) can prove profitable (read: Top Performing Bond ETFs of 1H).

Wisdomtree Global Hedged Small Cap ETF HGSD

With talks of policy easing doing rounds on the foreign shores, a look at the global small-cap fund deserves a mention. U.S. accounts for half of the fund followed by Japan (10.58%), Canada (5.72%) and the U.K. (4.72%). But for that a currency-hedged approach is likely to be beneficial (read: Wisdom Tree Small-Cap Global ETF: Currency Hedged Version).