Welcome Powell Era With These ETFs

Now that Janet Yellen has ended her four-year term, it’s time to welcome the Jerome Powell era. The new Fed Chairman provided a relatively more bullish outlook of the U.S. economy but mentioned balanced risks. Powell highlighted in his first Congressional testimony that the central bank is on its course to raise rates gradually.

He indicated that the economic outlook has picked up more pace since December, given stronger growth and inflation data, the passing of the tax reform and an uptick in government spending in a January budget deal. Such strong outlook about the economy upset investors.

Powell also said that the Fed does not see wild moves in the stock market to hurt the “outlook for economic activity, the labor market and inflation." He also does not see tax cuts and spending increases to overheat the economy.

He has a lot of hopes on the job market strength and expects wage growth to boost household income and consumer spending. He expects inflation to move up this year and attain the Fed's 2% goal.

Though Powell did not talk about any increase in the number of rate hikes, private economists took Powell's comments as a harbinger of further policy tightening announcement at its next meeting in March. Some market watchers expect as many as four interest rate hikes this year and the same next year.

Investors widely expect the Fed to hike its key rate in March, into a range of 1.50—1.75%, and most expect another quarter point hike in June. Benchmark Treasury yields climbed to 2.90% on Feb 27, reflecting Powell’s testimony.

Market Impact

Both stocks and bonds slipped on Powell’s comments. Three big ETFs including SPDR S&P 500 ETF (NYSE:SPY) (AX:SPY) , SPDR Dow Jones Industrial Average (SI:SPDR) ETF (V:DIA) and PowerShares QQQ ETF QQQ lost about 1.27%, 1.15% and 1.24% on Feb 27 while the long-term Treasury bond ETF iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (V:TLT) shed about 0.1%.

PowerShares DB US Dollar Bullish ETF (NYSE:UUP) UUP gained about 0.6% while non-interest-bearing asset gold lost with SPDR Gold Shares (HK:2840) (V:GLD) retreating more than 1% (read: Is Pain in Store for Gold Mining ETFs on Muted Earnings?).

ETF Strategies to Welcome Powell Era

Powell showed confidence in exchange-traded funds and acknowledged that ETFs were not 'at the heart' of U.S. market selloff seen earlier this month. So, what could be the best bets than targeting some ETFs that negate rising rate fears and match with Powell’s view on the economy and investments?

ETF Industry Exposure & Financial Services ETF TETF

With Powell having faith on the ETF industry, a look at this product makes sense. The underlying Toroso ETF Industry Index provides exposure to publicly traded companies that derive revenues from the Exchange Traded Funds ecosystem (read: ETFs Are the Best Growth Story in Finance, How Can You Invest?).

iShares U.S. Broker-Dealers & Securities Exchanges ETF (WA:IAI)

The underlying Dow Jones U.S. Select Investment Services Index measures the performance of the investment services sector of the U.S. equity market. The underlying stocks perform better in a rising rate environment.

iShares Treasury Floating Rate Bond ETF TFLO

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. TFLO or iShares Floating Rate Bond FLOT could thus be good bets.

First Trust Nasdaq Semiconductor ETF FTXL

The technology sector has been in great shape. Emerging new technologies like cloud computing, big data and Internet of Things (IoT) are expected to drive the sector in the coming days. This kind of a cyclical sector often grows in an improving economy (read: 5 ETF Ways to Tap Hot Semiconductor Stocks).

Amplify Online Retail ETF IBUY

The consumer discretionary sector’s performance is closely related to the state of the economy and it has historically rewarded investors with outsized returns when the economic picture improves. So, we can take a look at online retailing and tap IBUY for gains.

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