The Federal Reserve’s policymakers have been meeting this week to discuss the Fed’s monetary policy and the economy’s rate of recovery. Interest rates will remain unchanged. There are ways to capitalize on the decision with exchange traded funds (ETFs).

The Central Bank will keep rates unchanged, but the widening yield spreads between mortgage-backed securities (MBS) and federal agency debt against Treasuries may be an essential factor in determining the Fed’s stance on the direction of interest rates, reports Julie Haviv for Reuters. The Fed will buy $1.25 trillion allotted for its MBS program by the end of the first quarter of 2010. (ETFs to shelter against a weak dollar).

Purchase programs have inflated some securities to the point that investors are beginning to turn to the risk/reward of alternative spread products like corporate bonds. For instance, the yield spread on the 30-year Fannie Mae 4.5% current coupon stood at 1.47% over the 5- and 10-year Treasury blend, says Arthur Frank, director and head of MBS research at Deutsche Bank Securities.

The Fed’s decision ultimately could keep the dollar weak for the time being. To capitalize on continued weakness in our currency, consider some of the following ETFs:

  • PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN). UDN is up 7.2% year-to-date. This ETF seeks to reflect the performance of the short side of U.S. dollar – basically, the dollar goes down the fund goes up. (More on UDN and a weaker dollar).

  • CurrencyShares Euro Trust (NYSEArca: FXE). FXE is up 5.4% year-to-date. A straight forex play on the appreciating euro. As the dollar depreciates against the euro, the euro gains in strength. FXE tries to reflect those gains. (More on FXE and the euro)

  • iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM). EEM is up 54.1 % year-to-date. By holding non-dollar-denominated assets, such as emerging market equities, investors  can hedge against weakness. Emerging market investments get the benefit of the “dollar kicker” since assets denominated in foreign currencies are eventually converted back to weaker U.S. dollars. (More on EEM and emerging markets).