ETFs for a Dovish Fed: A Look at Asset Categories Investors Will Target


Additionally, the Legg Mason Low Volatility High Dividend ETF (NasdaqGM: LVHD) should help investors who are seeking new sources of yield in a changing market environment. LVHD selects U.S. equity stocks with relatively high yield and low price and earnings volatility, and the fund only selects profitable companies. LVHD has a 4.08% 30-day SEC yield.

With the Fed holding interest rates and only anticipating two rate hikes this year, fixed-income investors may also turn to riskier high-yield securities, like speculative grade and emerging market debt

After the selling over the past year, high-yield or junk bonds look cheaper and yields appear much more attractive. For instance, the popular SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) has a 7.14% 30-day SEC yield and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has a 6.95% 30-day SEC yield.

Emerging market bonds are also enjoying the more risk-on attitude after the poor performance in the developing markets. Additionally, the weakening U.S. dollar has also made emerging assets more attractive.

Fixed-income investors can gain exposure to the developing market sovereign debt through a number of options. For local currency-denominated emerging market bond ETFs, the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) has a 4.37% 30-day SEC yield. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) has a 5.58% 30-day SEC yield.

Moreover, if the Fed maintains an extended low-rate outlook, the U.S. dollar will continue to come under pressure without the central bank there to support the greenback with a tighter monetary policy. Consequently, gold may continue to shine.

For gold exposure, the SPDR Gold Shares (NYSEArca: GLD), the world’s largest ETF backed by physical holdings of gold, has been a go-to option for large traders, hedge funds and institutional investors seeking to capitalize on its large pool of liquidity and tight bid-ask spreads. Similarly, the iShares Gold Trust (NYSEArca: IAU) is another large option with a lot of active trading. Individual retail investors who do not need to move millions of dollars of gold but would rather sit on to their gold exposure may find IAU a cheap buy-and-hold option. Something like GLD would be a better play for large institutional-sized traders who execute huge trades due to the fund’s tight spreads and activity.

Alternatively, since IAU and GLD shares are backed by gold stored in London vaults, investors can take a look at the ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) to diversify gold exposure. If something were to happen in London that could affect the gold stored there, SGOL investors will be relieved to know that their gold exposure is stored in Swiss vaults.

For full disclosure: Tom Lydon’s clients own shares of SDY, NOBL, JNK, HYG, GLD.