The reopening trade is putting rising Treasury yields and small cap ETFs in the growth-fueled spotlight. This should spur an interest in ETFs like the iShares Floating Rate Bond ETF (FLOT) and the iShares Russell 2000 ETF (IWM).
Citing an economic recovery in tow, the Fed recently decided to keep rates steady while forecasting stronger guidance for the next couple of years.
“As widely expected, the Fed held interest rates steady at a near-zero level in its latest meeting,” a Nasdaq article said. “U.S. interest rates have been this low since March 2020. Federal Reserve officials continued to project near-zero interest rates at least through 2023, while boosting economic growth expectations on vaccine and stimulus optimism.”
FLOT seeks to track the investment results of an index composed of U.S. dollar-denominated, investment-grade floating rate bonds with remaining maturities between one month and five years. The ETF seeks investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US Floating Rate Note Less Than 5 Years Index.
IWM seeks to track the investment results of the Russell 2000® Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index.
It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index. The fund is up 15% so far in 2021.
An Optimistic Fed
The markets were showered with some general optimism from the Fed Wednesday, which projected more growth by upping its forecast for GDP growth for the rest of the year.
“The Fed upgraded its forecast for 2021 GDP growth from 4.2% in December to 6.5% and beefed up the 2022 growth forecast from 3.2% to 3.3%,” the Nasdaq article noted. “However, growth is likely to slow down in 2023 to 2.4% from 2.2%. The Fed projected the longer-run growth measure at 1.8%.”
The labor market also got a vote of confidence from the Fed.
“Unemployment was guided down to 4.5% from 5.0% for 2021, 3.9% from 4.2% for 2022 and 3.5% from 3.7% for 2023,” Nasdaq concluded. “PCE inflation expectation has gone up to 2.4% for 2021 from 1.8% projected in December, to 2.0% for 2022 (from 1.9%) and 2.1% for 2023 (from 2.0%). Median Federal funds rate projection for the long term was kept unchanged at 2.0%.”
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