ETFs
High rates to stay? ETFs to secure your portfolio – May 28, 2024
Fed leaders have raised the possibility that interest rates will remain high for an extended period if inflation data remains unfavorable. According to CNBCThe recently released minutes of the Federal Open Market Committee’s April 30-May 1 policy meeting indicated policymakers’ concerns about the timing of interest rate cuts.
Underscoring concerns over inflation, policymakers’ lack of confidence in an interest rate cut is highlighted by falling market expectations for rate cuts.
Will the interest rate remain high?
Revising their expectations downwards compared to the reductions of at least six quarter points previously envisaged, investors are currently anticipating two rate cuts this year, starting in September. However, with the chances of further cuts diminishing, investors estimate a September rate cut to be around 50%.
Several participants at the Federal Open Market Committee’s April 30-May 1 policy meeting said they were prepared to tighten policy further if inflation risks materialize, according to CNBC.
According to David Solomon, CEO of Goldman Sachs, as cited on Treasury and Riskthe Fed may not cut interest rates in 2024 due to a resilient economy supported by government spending.
JPMorgan Chase Chairman and CEO Jamie Dimon shares a similar view. According to a CNBC articleDimon believes it is still likely that interest rates will be raised further to control persistently high inflation levels fueled by ongoing fiscal and monetary stimulus. Dimon also warns that stagflation in the economy, with persistent inflation amid sluggish growth and high unemployment, is the worst outcome.
Explore the factors that keep rates high
According to a Reuters article, high interest rates could persist not only this year, but perhaps even longer if financial markets prove correct. The increase in public debt due to increased spending needs leads to high interest costs, which can keep interest rates high for a longer period.
As global investments increasingly prioritize climate control, interest rates could remain high due to the huge investment demand for the transition to a green economy.
Goldman Sachs projects that productivity improvements through AI could increase U.S. economic growth by 0.4 percentage points by 2034, according to Reuters. The company predicts that rates could increase, especially if the use of AI accelerates.
Explore ETFs
Below, we’ve highlighted a few areas of ETFs that investors might consider expanding their exposure to. These provide a hedge against uncertainties surrounding changes in interest rates.
Value ETFs
Value stocks exhibit long-term outperformance and resilience to market trends. Characterized by strong fundamentals such as earnings, dividends, book value and cash flow, these stocks are trading below their intrinsic value, representing undervaluation. They offer the potential for higher returns and lower volatility compared to growth and blend stocks.
Vanguard Value ETF (VTV – Free report) – has gained 14.30% over the past year and 4.39% over the past three months.
iShares Russell 1000 Value ETF (IWD – Free report) – has gained 13.25% over the past year and 4.14% over the past three months.
iShares S&P 500 Value ETF (I.V.E. – Free report) – has gained 17.95% over the past year and 3.06% over the past three months.
Dividend ETF
Dividend-paying stocks are the primary sources of reliable income for investors, especially during periods of stock market volatility. These stocks provide a dual benefit of security: in the form of payouts and stability in the form of mature companies that are less volatile in the face of large fluctuations in stock prices. Companies offering dividends often serve as a hedge against economic uncertainty.
Vanguard Dividend Appreciation ETF (VIG – Free report) – has a dividend yield of 1.76% and has gained 13.29% over the past year.
Schwab US Dividend Stock ETF (SCHD – Free report) – has a dividend yield of 3.37% and has gained 9.91% over the past year.
Vanguard High Dividend Yield Index ETF (VYM – Free report) – has a dividend yield of 2.83% and 12.42% over the past year.
Consumer Staples ETF
Consumer staples are essential products such as food, drinks, household items and hygiene products, including alcohol and tobacco. They are non-cyclical, with demand remaining constant regardless of economic conditions.
Select Consumer Staples Sector SPDR Funds (XLP – Free report) – has gained 0.36% over the past year and 4.31% over the past three months.
Vanguard Consumer Staples ETF (VCC – Free report) – has gained 2.87% over the past year and 4.64% over the past three months.
Staples iShares US Consumer ETF (IYK – Free report) – has lost 0.40% over the past year and 4.15% over the past three months.
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