Fed To Not Hike Rates In 2020: ETF Areas To Shine

The Federal Reserve stayed put on its interest rate policy on Dec 11, after three rate cuts this year. It also hinted at keeping interest rates unchanged in 2020 unless there is any drastic change in the economic outlook. The central bank has kept the benchmark interest rates at the band of 1.50-1.75%.

Federal funds rate projections made in September very good place ."

Against this backdrop, we highlight a few ETFs that could emerge as winners in 2020, if U.S.-China trade relations remain smooth.

Overall U.S. Equities

As rates won’t be hiked next year, incessant cheap money inflows will likely strengthen stocks further. Investors should also note that though there are pockets of weakness, the U.S. economy is better positioned than most developed economies. This should be favorable for stock investing. A partial U.S.-China trade deal (if signed) could add to the strength of the equity market.

However, in a low-rate environment, investors would be more interested in securities that ensure regular current income. Our top pick here is SPDR Dow Jones Industrial Average (NYSE:DIA) ETF (TSXV:DIA) , which yields 2.04% currently, higher than the benchmark U.S. treasury yield (1.79% as of Dec 11). The fund has a Zacks Rank #1 (Strong Buy).

Also, Dow has underperformed its other two counterparts the S&P 500 and the Nasdaq this year partly because of Boeing’s weakness (Dow’s one of the key holdings). So, 2020 can be a game changer for the index. Low rates can be helpful for industrial stock-heavy Dow index (read: Can Dow ETFs Be a Winner in 2020? ).

Apart from this, Industrial Select Sector SPDR Fund What Soft Confidence? 3 ETFs & Stocks for Solid Holiday Buying ).

Value Stocks

Wall Street has been rallying in recent weeks and is positioned to rise further on cheap value stocks, if we go by analysts’ comments. In fact, value stocks have gained more than momentum stocks in recent months.Per Bank of America (NYSE:BAC), “Value ETFs & Stocks Offering Real Value: 5 Top Picks ).

Emerging Markets

Thanks to a dovish Fed, EM equities should be up for a stellar performance. Investors should note that the Fed has enacted three rate cuts since July, which have weakened the greenback to some extent. Invesco DB US Dollar Index Bullish Fund UUP is down 0.5% in the past three months (as of Dec 11, 2019). Since EM equities tend to perform better in a low-rate and low-dollar environment, EM assets had every reason to outperform.

Asia has the best prospects, Emerging Market ETFs Beating the Broader Market: Here's How ).

Dividends

The past decade was especially favorable for dividend ETFs as central banks, including the Fed, have been ultra-dovish. Research shows that dividend stocks often beat their non-dividend paying counterparts over longer periods. So, one can pin hopes on iShares Core High Dividend ETF OUSA (yields 2.38% and Rank #1).

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Utilities

Utilities stocks perform better in a low-rate environment and thus should do well in 2020. If there is any market crash next year due to U.S. elections and trade uncertainty, utilities stocks will outperform due to their safe status. Further, U.S. utility companies have less exposure to China and thus come across as trade-resilient. This makes Zacks Rank #2 Utilities Select Sector SPDR Fund 6 Trade-Proof Sector ETFs to Follow if No Deal is Cracked ).

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Zacks Investment Research

Written By: Zacks Investment Research