ETFs
These Fixed Income ETFs Are Benefiting From Fed’s Stalled Rate Cut Plans
These Fixed Income ETFs Are Benefiting From Fed’s Stalled Rate Cut Plans
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The Federal Reserve has kept its policy rate at 5.25%-5.5% since July 2023 to combat soaring inflation rates. While overall price levels have stabilized since then, the consumer price index rose 2.6% in May, slightly above the central bank’s 2% target.
In January, the Fed had already announced three rate cuts in 2024. However, its forecasts have been revised downward and now only foresee one later in the year due to persistent inflation rates.
“U.S. inflation remains elevated, and I continue to see a number of upside inflation risks to my outlook. I remain willing to raise the target range for the federal funds rate at a future meeting if inflation stalls or even reverses,” said Michelle Bowman, Fed Governor and a voting member of the Federal Open Market Committee. “Cutting our policy rate too early or too quickly could cause inflation to rebound, requiring further future rate increases to bring inflation back to 2 percent over the long term.”
High interest rates have been a boon for fixed income securities, allowing investors to reap higher returns with minimal risk.
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iShares Core Total USD Bond Market ETF
The iShares Core Total USD Bond Market ETF (NASDAQ:IUSB) invests in high-quality securities issued by governments, corporations and mortgages. Approximately 37.25% of the ETF’s portfolio is invested in U.S. Treasuries, while approximately 15% is invested in bonds issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
The iShares Core Total USD Bond Market ETF is currently enjoying higher yields as the Federal Reserve keeps its policy rates unchanged. This makes it an attractive option for income-oriented investors.
The ETF pays $1.71 in dividends per year, which represents a 3.8% yield from the current price. It’s worth noting that the iShares Core Total USD Bond Market ETF’s dividends have increased nearly 22% year over year and at a compound annual growth rate (CAGR) of 12.3% over the past three years.
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Vanguard Short Term Inflation Protected ETF
The Vanguard Short-Term Inflation-Protected Securities ETF (NASDAQ:VTIP) invests primarily in U.S. Treasury Inflation-Protected Securities (TIPS) with short- and intermediate-term maturities, generally less than five years.
The story continues
Although inflation has slowed, the Fed’s decision to wait for further progress before lowering interest rates provides a hedge against potential inflationary pressures. VTIP is an attractive alternative for investors looking to protect their portfolios from inflation while taking advantage of the current interest rate environment.
The Vanguard Short-Term Inflation-Protected Securities ETF pays $1.45 in dividends per year, which is a yield of 3.02% on the current price. The ETF’s dividend payments have grown at a CAGR of 6.9% over the past three years and 51.3% over the past 10 years.
ETF SPDR Portfolio Corporate Bond (SPBO)
The SPDR Portfolio Corporate Bond ETF (SPBO) invests in investment-grade corporate bonds. The ETF’s top holdings include debt securities issued by JPMorgan Chase, Wells Fargo, and Bank of America Corp, among others.
The SPDR Portfolio Corporate Bond ETF’s portfolio is primarily comprised of investment-grade corporate debt securities issued by large-cap companies with excellent credit ratings. This makes it an attractive fixed-income investment option, as it offers both income and the potential for capital appreciation. The SPDR Portfolio Corporate Bond ETF pays $1.48 in dividends per year, representing a yield of 5.19% on the current price. The SPDR Portfolio Corporate Bond ETF’s dividends have grown at a CAGR of 16.8% over the past three years.
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