There might be some good news to come from all this Federal Reserve quantitative easing tapering talk investors have been subjected to over the past few weeks. Should the Fed begin winding down its third version of quantitative easing, that could be perceived as a sign the U.S. economy is improving. That could spark a rally in cyclical sector ETFs.
“If the Fed begins to taper its purchases in keeping with an improving economy, we believe the market should ultimately behave quite well,” writes Liz Ann Sonders, Senior Vice President and Chief Investment Strategist at Charles Schwab, for Barron’s. “There has been some weakness in economic momentum recently, though the weakness has largely been among inflation readings.”
Should that forecast prove accurate, investors will want to examine cyclical ETFs, even if interest rates rise. Given the current environment, Schwab has upgraded their recommendations on industrials to join technology stocks as “outperform” Consumer discretionary was also upgraded to “market perform.” [Cyclical ETFs Can Perform if Rates Rise]
Investors will not want to forget about dividends, though, and there is at least one new dividend ETF that can help investors generate income while taking part in a cyclical rotation. The FlexShares Quality Dividend Index Fund (NYSEArca: QDF) debuted in mid-December and has benefited from the flight to yield having accumulated almost $100 million in assets under management.
QDF is designed to deliver of a beta that is comparable to its underlying index, the Northern Trust 1250 Index, while delivering a yield that is in excess of the index’s, according to FlexShares. The weighted average dividend yield on the fund is 3.37% and QDF is up 15.3% this year. Look at QDF this way: It has outperformed the SPDR S&P 500 (NYSEArca: SPY) by over 300 basis this year with a yield that is more than 130 basis higher.
What makes QDF attractive right now is its sector mix. Should interest rates rise in earnest, capital intensive sectors such as utilities and telecommunications will be vulnerable. The market has already spoken to that effect. [Interest Rates Dim Utilities ETFs]