Fed Likely to Remain Dovish: ETFs to Buy

The Federal Reserve is likely to maintain its dovish stance in the upcoming meeting and also likely to take the same stand for at least the rest of this year, despite the heating-up of inflation and a tightening labor market, according to the latest CNBC Fed Survey.

As in previous surveys, respondents forecast the first major change the Fed will make to monetary policy will be reduction in its $120 billion in monthly asset purchases, expecting a tapering announcement in October 2021 and the reduction to begin in January 2022, as quoted on CNBC.

However, survey respondents forecasted that the first rate hike would take place in November 2022, one month earlier than the previous survey’s forecast, and for the first time since December 2018, the article also indicated.

Per the CNBC article, 86% of the respondents believe that the current level of asset purchases is not required to help the market function – a major uptick from the 68% who answered the same way in the April survey. Even more respondents – 89% — say the asset purchases are not needed to help the economy, up from 65% in April.

As of now, the average forecast for 2021 year-over-year CPI was 3.88%, a sharp uptick from 2.76% in the previous survey. On average, respondents believed CPI would peak at 5.3% in November 2021.

Against this backdrop, below we highlight a few ETFs that could prove to be winning bets in the current scenario.

iShares Edge MSCI USA Momentum Factor ETF MTUM

The scenario would prove great for the stock market. The underlying index measures the performance of U.S. large and mid-capitalization stocks exhibiting relatively higher momentum characteristics. The fund charges 15 bps in fees.

SPDR S&P Bank ETF KBE

If long-term rates rise on upbeat economic growth and short-term rates remain subdued on a dovish Fed, we will end up seeing a steepening in the yield curve. A steepening of the yield curve is good for banking stocks. The underlying S&P Banks Select Industry Index is a modified equal-weighted index that looks to reflect the performance of publicly traded companies that do business as banks or thrifts. The fund charges 35 bps in fees (read: Core Inflation at 29-Year High: 6 ETF Areas to Benefit).

Vanguard Small Cap Growth ETF VBK

The combined force of an easy money policy and an upbeat U.S. economic growth momentum should bode well for domestically focused small-cap stocks. The fund charges 7 bps in fees.

SPDR S&P 500 ETF Trust SPY

Blend ETFs that give exposure to both value and growth stocks should be great now. Higher inflationary environment and the resultant rise in interest rates will give rise to strength in value stocks. Meanwhile, the rise in rates would likely be moderate as the Fed will likely remain dovish. This would prove beneficial for growth stocks.

The underlying S&P 500 Index is composed of five hundred selected stocks, all of which are listed on national stock exchanges and span over 25 separate industry groups.