Odds For December Fed Rate Hike Pretty High: ETFs To Invest

The Fed enacted three rate hikes this year in its September meeting and is on its way to enact the fourth one in December. As of now, the analysts foresee 79% chance of a 25-bp rate hike next month.

In its September meeting, the central bank commented that the U.S. economy is expected to see at least three more years of growth, per Reuters, and maintained its view of three more hikes next year and one in 2020. If these happen, the rates will reach a level beyond which monetary policy will neither be accommodative nor tight.

However, such monetary policy has caused quite an upheaval in the stock market of late as rising rate concerns led analysts to correct valuations. There has been a bloodbath in the market in the October-November period, with the S&P 500 losing about 7.4% in the past months (as of Nov 27, 2018). Morgan Stanley (NYSE:MS) also downgraded U.S. equities to "underweight."

Against this backdrop, below we highlight a few ETF areas that could be up for gains in the coming days.

Large-Cap Value

With talks doing rounds that the U.S. economy will slow in 2019 and may enter into recession in 2020, things may go against the small-cap stocks that are more domestically focused. Goldman expects U.S. GDP growth will be sluggish at 1.8% in the third quarter of 2019 and at 1.6% during the fourth quarter. The tailwind of the tax cuts passed in late 2017 will likely phase out and tighter monetary conditions and higher trade tariffs will retard the growth momentum.

Given this, large-cap value ETFs could offer some cushion against the sell-off and volatility. ETFs like SPDR Portfolio S&P 500 Value ETF (SPYV) and iShares Morningstar Large-Cap Value ETF JKF should thus be on investors’ radar.

High-Yield Securities

Securities that offer benchmark-beating yields should make up for the capital losses.One such product is iShares iBoxx USD High Yield Corporate Bond ETF ( (TO:HYG) ),which yields 5.37% annually. The fund has seen inflows of $747.3 million in the week ended Nov 26, 2018.

Emerging Markets Securities

Since emerging markets (EM) have been staging a rebound at the current level due to cheaper valuation, have relatively lower debt-to-GDP ratio and offer higher yields, investors can take a look at EM bond ETFs (read: Emerging Markets on a Rebound? 5 ETFs Seeing Big Inflows).

iShares JPMorgan (NYSE:JPM) USD Emerg Markets Bond ETF ( (AX:EMB) ), which yields about 4.79% annually, has garnered about $ 239.0 million in assets against $923.8 million of outflows seen in iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF ( (NZ:TLT) ) so far this month.

Another way to play the emerging market turnaround right now is to invest in high-dividend EM equities ETFs like iShares Emerging Markets Dividend ETF DVYE that yield around 5.7% -- much higher than the present benchmark Treasury yields. The fund has attracted about $93.95 million in assets so far in November.

Floating Rate Bonds

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 with traditional bonds (read: Hedge Rising Rates with Floating Rate ETFs).

Unlike fixed coupon bonds, these do not lose value when rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment.iShares Floating Rate Bond (TO:FLOT) is a good bet in this context. The fund has fetched about $523.6 million so far this month.

Short-Term Bonds

Investors should note that yield on short-term Treasury bills outdoes U.S. inflation, meaning investors can now have real, inflation-adjusted return from cash for the first time in a decade, per Financial Times.

Investors should note that yield on two-month treasury note stood at 2.37% on Nov 27, up from 2.28% seen at the start of the month. Short-term bond ETFs like iShares 1-3 Year Treasury Bond ETF (SHY), iShares Short Treasury Bond ETF (AX:SHV) , SPDR Bloomberg Barclays (LON:BARC) 1-3 Month T-Bill ETF (BO:BIL) , Vanguard Short-Term Treasury Index ETF (VGSH) and JPMorgan Ultra-Short Income ETF (JPST) attracted about $814.7 million,$585 million, $480 million, $340.6 million and $333.8 million, respectively.

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