Dovish Fed Trims U.S. Outlook: ETFs To Buy

As widely expected, downbeat May jobs data won and the otherwise-improving U.S. economy lost status.

The month of May saw the addition of just 38,000 new jobs. This is more than 100,000 short of analysts’ estimated low range prior to the release of the report. Job growth in May was the lowest in over five years. This data oozed almost all hopes out of a near-term Fed rate hike (read: Dull U.S. Job Data Brighten These ETFs).

Added to this, a tumultuous global economy including overall growth issues and Brexit fears held the Fed back from taking the policy tightening lane in the meeting that concluded yesterday. The U.S. central bank pulled the trigger for a lift-off in December 2015 after almost a decade, but stayed put right there since then, keeping the rates unchanged.

What’s New in the Meeting

Lower Number of Hikes in the Cards

Though the Fed maintained its plans for two rate hikes this year, the present scenario will probably allow just one. Six of the Fed’s 17 policymakers now expect one hike this year, substantially up from only one supporter in March.

The Fed also lowered the number of potential hikes in each of 2017 and 2018 from four to three. While the Fed still expects rates at 0.9% by the end of 2016, it pared the estimate for the funds rate for 2017 to 1.6% from the 1.9% projection in March. In fact, the Fed funds rate for the long run was slashed to 3% from 3.3%.

Reduced U.S. Growth Projection

The Fed went on to reduce its 2016 GDP estimate to 2% from 2.2%. This is the second time this year that the Fed has slashed the U.S. GDP estimate for 2016 from2.4%projected in December.

Any Silver Lining?

Amid all this gloom, the Fed indicated that inflation would pick up this year and raised its projected inflation rate to 1.4% from 1.2%. With oil prices bucking its downing trend, the inflationary scenario should bump up.

Is July Hike Possible?

Investors should also note that apart from the labor market data, several other economic readings including retail, housing and manufacturing are taking root. Even wage growth is gathering steam. So, the only glitch is the labor market condition and the Brexit possibility which will be closely monitored and ‘factored in’ before taking any decision in July or in the future months (read: Safe Haven ETFs Surge on Brexit Fears).

Market Impact

Though the world was almost sure about a dovish Fed meeting in June following the job data release, no one had expected a downcast comment on U.S. economic growth. As a result, the stock market reacted a little negatively. Among the top ETFs, investors saw (AX:SPY) and (V:DIA) lose about 0.14% each and QQQ move lower by about 0.3% on June 15. However, all three ETFs were in the green after hours.

Some subtle moves in various markets and asset classes were also noticed. U.S. sovereign bond prices recorded gains post Fed meet while the yield on the 10-year U.S. Treasury note slipped to as low as 1.60%. The U.S. dollar was a loser following a dovish Fed with PowerShares DB US Dollar Bullish Fund UUP shedding over 0.2% (read: Rising ETFs in a Falling Dollar Environment).

ETFs to Buy

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

Bond Picks

In a low-yield environment, yield hungry investors flocked to fixed-income ETFs. Among the lot, safe asset treasuries and the relatively safer muni bond ETFs drew attention. In the coming days too, investors can have a look at PIMCO 25+ Year Zero Coupon US Treasury ETF ZROZ and muni bond ETF VanEck Vectors AMT-Free Interm Muni ETF (LON:ITM) for gains. Higher-yield muni bond ETF Vanguard Long-Term Bond ETF BLV and TIPS ETF FlexShares iBoxx 5Yr Target Dur TIPS ETF TDTF can also prove to be good bets.

Gold Picks

Higher bid for safety and a subdued greenback is a winning combination for gold investing. Gold mining ETFs can also be tapped to play this uptrend. SPDR Gold Shares (NYSE:GLD) ( (LAGOS:GLD) ) and VanEck Vectors Junior Gold Miners ETF (NYSE:GDX) GDXJ are the two choices in this category (read: Gold ETF Investing: 10 Facts Investors Need to Know).

Growth Equity Picks

With assurance of more days of cheap money inflows, growth stocks are likely to fly high now. Investors can play this theme with iShares Russell Mid-Cap Growth ETF IWP. Mid caps offer a middle of the road approach between large and small-caps and have moderate exposure in both domestic and foreign lands.

Sector Picks

High dividend paying sectors normally perform better in a low-yield environment. Thus REIT ETFs like Vanguard REIT ETF VNQ is worth a look. The fund yields about 4.17% annually. Housing ETF SPDR S&P Homebuilders XHB is also a great betin such an environment.

International Picks

A dovish Fed is always favorable for emerging market stocks. It is better to play this idea with a dividend focus. iShares Emerging Markets Dividend ETF DVYE which yields about 5.63% annually can be a good pick to quench the thirst for yield.

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