Fed Hike Virtually Locked In! My Urgent ETF Strategies...
Janet Yellen and her Federal Reserve colleagues will meet to discuss interest rates next week. My take: Another rate hike is locked in! It would raise the federal funds rate from its current 0.5%-0.75% range to 0.75%-1%.
Forget about the fact virtually every Fed official has already gone on record hinting at another hike. The data is what really clinches it for me.
Consumer confidence just soared to its highest level in almost 16 years. The ISM manufacturing gauge just rose to a 30-month high of 57.7 in February. Then on Wednesday, the ADP Research Institute reported a blowout jobs number.
Specifically, the private group found the U.S. added 298,000 jobs last month. That easily topped the 187,000 consensus estimate from Wall Street economists. Strength was widespread across business size, and across industries – with 25,000 jobs added in information technology, 40,000 in leisure and hospitality, 40,000 in education and health, and 66,000 in professional and business services, among other gains.
The economy has clearly shifted into a higher gear over the past few months. And it’s happening before many of Donald Trump’s proposed policies even get enacted.
If you layer tax cuts, massive infrastructure spending, and deep cuts to regulation on top of an already accelerating economy, you have a recipe for much higher interest rates. I’m not talking about a “one and done” rate hike at the two-day Fed meeting March 14-15. I’m talking about a hike then, followed by multiple hikes later in 2017 and beyond.
So what ETFs should prosper when rates rise? Well, I’m about to release details on a major new program designed to answer that question (not to mention everything else you could ask about profiting from rising interest rates). So definitely stay tuned for more on that front.
But in the meantime, here are some things to consider:
• U.S. Treasury bonds, as well as high-grade, longer-term corporate bonds, are in the free fire zone here. The yield on the U.S. 10-year Treasury Note just climbed for eight days in a row, the longest losing streak since 2012.
But at around 2.57% recently, it still isn’t even as high as it was in late-2013, when the economy was in much worse shape. It’s also nowhere near the levels we saw the last time we saw coordinated upticks in global economic growth. That means this move could just be getting started.
So, if you own ETFs like the iShares 20+ Year Treasury Bond ETF (TLT, Rated “C-”), iShares 7-10 Year Treasury Bond ETF (IEF, Rated “C”), Vanguard Long-Term Corporate Bond ETF (VCLT, Rated “C”), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, Rated “C”), or any other ETF that owns medium-term to long-term, high-grade bonds, you should be paring down your exposure right away.
• Want to go a step further? Then consider buying ETFs that rise in value when bond prices decline and interest rates rise. ETF sponsors like ProShares and Direxion offer multiple ETFs that do so, utilizing varying degrees of leverage. The trick is in the timing there, which again, is something I’ll have more details about shortly.
ProShares and iShares also offer interest-rate “hedged” ETFs. They own select sectors of the bond market, while simultaneously hedging out the impact of rising rates using rate swaps or other derivatives and futures. Take the iShares Interest Rate Hedged Corporate Bond ETF (LQDH, Rated “C-”). It has delivered a total return of POSITIVE-3.6% over the past six months, compared with NEGATIVE-3.1% for its unhedged cousin, the LQD.
• The financial sector is in the catbird seat here, just as I’ve been saying for a while now. Banks, insurers, and brokers should benefit from the perfect positive storm of rising inflation … promises of deregulation … looser lending standards … the potential for bigger dividend payouts … accelerating economic growth … and a Federal Reserve that is all but certain to hike interest rates again and again in 2017 and 2018.
So if you’ve already purchased my just-released special report The Top 25 Financial Stocks Set to Clean Up in the Trump Administration, great. I believe you’ll be very happy with the performance of the stocks in it. If not, you still have time to get your hands on a copy by clicking here. But with the next Fed hike right around the corner, I wouldn’t wait too long.
Let me leave you with one final thought. David Tepper, the outspoken founder and president of the $17 billion hedge fund firm Appaloosa Management, came on CNBC Wednesday morning. He doesn’t do TV very often. But in the segment, he basically said the Fed was way behind the interest rate curve, and that everyone was (still) too pessimistic about the economy. He also said “you bet your heinie” he was “short” the bond market, or betting on lower bond prices and higher rates.
From everything I’m seeing, Tepper looks to be right on target. That means you shouldn’t wait to take steps to protect your wealth by using the ETF strategies I just outlined – or to turn rising rates into a tremendous profit opportunity!
Until next time,
ETF Spotlight Edition , by Mike Larson, Senior Analyst
Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, As-sociated Press, Reuters, CNNMoney and many others.