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As expected, the Fed kept the short-term interest rates steady in the 0.25-0.50% band in its meeting and dialed back its projection for this year’s hikes. The central bank now expects federal funds rate to rise to 0.875% by the end of the year, implying two lift-offs, compared with 1.375% that signals four rate hikes. The cautious approach came on the heels of increased market volatility, global growth concerns, and softness in exports and business investments. Given the circumstances, the Fed lowered the economic growth outlook for the year to 2.2% from 2.4%. However, it stated that economic activity has been expanding at a moderate pace amid global slowdown. This is especially true as unemployment dropped to an eight-year low of 4.9% and inflation climbed 2.3% in the 12 months through February, marking the biggest increase in more than three years, following the 2.2% increase in January. Further, cheap fuel will continue to lift consumers’ spending power, thereby, boosting economic growth. Notably, gas price has fallen by 46 cents from the year-ago period to an average of $1.96 per gallon that has resulted in about $1,000 more to spend at each household. Market Impact The move has led to a rally in the stock market with the Dow Jones Industrial Average and S&P 500 reaching the highest levels of 2016. With this, the stocks are on track for the fifth consecutive week of gains. This is because lower rates will step up economic growth by reducing borrowing costs and lowering the risks associated with expanding businesses or starting new ones. Additionally, demand for high-yield securities returned with the Fed’s lowered rate hike outlook and the two-year Treasury yields logged the biggest one-day decline in six months while the 10-year Treasury yields hit 2% for the first time since late January. On the other hand, the WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, dropped to its lowest level since October. Given this, we have highlighted three ETFs that will likely benefit the most from the Fed’s move and a couple of ETFs that will be severely impacted. ETFs to Gain SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold has been on a tear this year as increased market volatility has perked up demand for the yellow metal as a store of value and hedge against market turmoil. Additionally, the expectation for longer-than-expected low rates will continue to raise the appeal for the gold bullion. As a result, GLD, which tracks the price of gold bullion measured in U.S. dollars, spiked 2.2% at the close on the day after the Fed rate announcement. GLD is the ultra-popular gold ETF with AUM of $31.3 billion and average daily volume of around 8.1 million shares a day. Expense ratio comes in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) Mortgage REITs would benefit from lower rates as short-term rates would rise slower than the long-term rates thereby leading to a wide spread and higher profits for mREIT companies. The ultra-popular REM, with AUM of $759.2 million and average daily volume of around 1.2 million shares, gained 1.3% after the Fed meeting. It tracks the FTSE NAREIT All Mortgage Capped Index and holds 37 securities in its basket with large allocations to the top two firms – Annaly Capital (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ). These two firms collectively account for a combined 29.2% share while other securities hold less than 7.9% share. The fund charges investors 48 bps a year in fees and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) Low interest rates have made the high-yield corner of the fixed income world a hot investment area, drawing investors in huge numbers. HYG, in particular, could be an intriguing pick, charging investors 50 bps in fees per year. It is the largest and most liquid fund in the high yield bond space with AUM of $16.2 billion and average daily volume of more than 13.2 million shares. The fund tracks the iBoxx $ Liquid High Yield Index and holds 992 securities in the basket. Effective duration and average maturity are 3.99 and 4.83 years, respectively. HYG added 0.7% on the day and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook. ETFs to Lose PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) Lower interest rates will pull out capital from the country and lead to depreciation of the U.S. dollar. As such, UUP shed 1.1% on the day. The fund offers exposure to the greenback against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. It follows the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. So far, UUP has managed an asset base of $801.9 million while sees an average daily volume of around 1.6 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) As the rates are expected to remain low for long, financials stocks will take a hit. In particular, the ultra popular KRE, having AUM of $1.9 billion and average daily volume of 6.2 million shares, has lost 1.1% following the Fed meet. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 93 securities in its basket, the fund is widely spread out across each security with none holding more than 4.46% share. The product has a Zacks ETF Rank of 2 with a High risk outlook. Original Post Scalper1 News
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