What Do Fed Minutes Mean For The ETF World?

Though there was no spark in the latest Fed minutes, the underlying sense of the minutes reflect the central bank’s faith in economic growth. This is because the unemployment rate slipped to 4.1% and industrial output "increased briskly."

Holiday spending hit a record level this season, pointing to an upbeat consumer sentiment. The proposed personal tax cuts were deemed to provide a lift to consumer spending. The tax bill reduced the corporate tax rate from 35% to 21% and slashed income tax brackets for most payers.

The document noted that "real economic activity appeared to be growing at a solid pace, buttressed by gains in consumer and business spending, supportive financial conditions, and an improving global economy," as quoted on CNBC.com.

Fed officials also expect inflation to match their 2% target over the medium term. As inflation remained subdued for the most part of 2017 and missed the target, Fed officials felt the urgency to explain the reasons for the softness.

Most officials "judged that much of the softness in core inflation this year reflected transitory factors and that inflation would begin to rise as the influence of these factors waned." Having said this, it was indicated that "inflation might stay below the objective for longer than they currently expected."

Nevertheless, investors should note that amid all the optimism, Fed officials remained uncertain about how much economic benefit can be reaped from the tax plan. Especially, members were "quite uncertain" about what would be the effect of the tax bill on labor supply.

Immediate Market Reaction

PowerShares DB US Dollar Bullish ETF (NYSE:UUP) UUP emerged a winner as the dollar index registered its largest daily gain in more than two weeks. The fund gained about 0.4% on Jan 4, though it lost about 0.1% after hours.

On the other hand, SPDR Gold Shares (V:GLD) appeared a loser. Gold, though off to a great start in 2018, lost about 0.3% on Jan 4 on dollar strength. Notably, the price of gold shares an inverse relationship with the U.S. dollar (read: 5-Year Best January Opening for Gold: ETFs in Focus).

Expected Long-Term Winners

Notably, many Fed officials expressed concerns about the overvaluation in stocks thanks to prolonged accommodative policies. This means the Fed could hike rates faster than expected going forward. The central bank also has started a process to reduce the Fed's balance sheet.

Rising Rates ETFs

Fidelity Dividend ETF For Rising Rates FDRR is a nice pick in this regard. The underlying index of the fund reflects the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields (read: Another Rising Rates ETF on the Way).

Another choice isPowerShares S&P 500 Ex-Rate Sensitive Low Volatility Portfolio XRLV.The underlying index is composed of the 100 constituents of S&P 500 Index that exhibit both low volatility and low interest rate risk.

Dividend-Growth ETFs

Stocks and funds that have consistently increased dividend every year for a long period of time are considered safe investments. These generally act as a hedge against economic uncertainty and offer protection by offering sizable payouts on a regular basis. SPDR S&P Dividend (P:SDY_OLD) ETF (TO:SDY) thus can be a good bet if volatility flares up (read: What Makes iShares' Dividend and Buyback ETF Launch Timely?).

Play Niche Bond ETFs

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. iShares Floating Rate Bond FLOT is a good bet in this context (read: FLOT vs. FLRN: The Best Floating Rate ETF).

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