Powell To Lead Fed: Best ETF Strategies

The current Fed Chair Janet Yellen’s four-year term ends in February and all eyes are now on the next likely takers of the seat. The Wall Street Journal reported on Wednesday, mentioning anonymous sources, that President Trump has chosen Jerome Powell as the next Fed chair, as quoted on Fortune.

Why Markets Are Betting on Powell

Powell has been a Fed governor since 2012 and is a Republican with considerable contribution to the party’s establishment and in the financial industry. Though he has been a follower or supporter of Yellen’s style in handling monetary policy, Powell is less stringent than Yellen when it comes to enacting or pursuing Dodd-Frank regulations.

This is where Trump would prefer Powell over Yellen as the President views the Dodd-Frank regulatory revamp as unreasonably strict on smaller banks. The Dodd-Frank Act is a U.S. federal law that entrusts the government with regulations for the financial industry. Powell in fact intends to revise the Volcker Rule for an easier version, as per a fortune.com article (read: Play Banking Bonanza with These ETFs in Trump World).

The article mentioned another reason for Trump’s support for Powell. Trump seemed have to favored persons with corporate backgrounds — “both Treasury Secretary Steven Mnuchin and National Economic Council Chair Gary Cohn are Goldman Sachs (NYSE:GS) alumni.” Notably, Powell too belongs to corporate America.

Powell-Friendly Investments

Regional Bank ETFs

Powell is in favor of rising rates. “If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates,” and “I would also see it as appropriate to begin the process of reducing the size of the balance sheet later this year” – are two of his recent comments (read: Are Regional Bank ETFs Best Positioned to Profit from a Trump Presidency?).

This along with easing regulations and chances of tax reforms would boost regional banks substantially. This puts ETFs like SPDR S&P Regional Banking ETF (CO:KRE) , iShares U.S. Regional Banks ETF (LON:IAT) , PowerShares KBW Regional Banking Portfolio KBWR, Direxion Daily Regional Banks Bull 3X Shares DPST and Direxion Daily Regional Banks Bear 3X Shares WDRW in focus (read: GOP Nears Tax Reform: Buy These ETFs).

Niche Bond ETFs

Since Powell is expected to carry Yellen’s hawkish monetary policy stance forward, we may see a rising rate environment in 2018. To fight this situation, one may consider playing niche bond ETFs (read: ETF Tricks to Stave Off Rising Rate Risks This Halloween).

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. iShares Floating Rate Bond FLOT is a good bet in this context.

Another option in this space is to tap bank loan ETFs like Highland/iBoxx Senior Loan ETF (SI:SNLN) . Senior loans, also known as leveraged loans, are private debt instruments issued by a bank and syndicated by a group of banks or institutional investors. It yields about 4.60% annually.

Growth ETFs

Whoever gets to the chair, analysts do not see a "rapid increase" of interest rates next year. This along with higher chances of deregulation should favor growth investing. So, investors can target ETFs like PowerShares QQQ QQQ, iShares Russell 1000 Growth ETF IWF, iShares S&P Mid-Cap 400 Growth ETF IJK and iShares S&P SmallCap 600 Growth ETF IJT.

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