High-Dividend ETFs: Winners Amid Fed's Higher-for-Longer Rate Cues

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The Fed kept interest rates unchanged at its September meeting but signaled its anticipation of one more rate hike before the end of this year and a reduction in the number of rate cuts forecast for the following year.

Financial markets had already fully factored in no change in rates during this meeting, maintaining the fed funds rate at a targeted range of 5.25% to 5.5%, the highest level in approximately 22 years. The Fed anticipates gradually cooling inflation while the labor market remains exceptionally tight.

Rates to Remain Higher for Longer

If the Fed proceeds with this anticipated increase, it will mark the twelfth hike since the commencement of policy tightening in March 2022. Documents released during the meeting indicate a prevailing bias toward a more restrictive policy stance and a prolonged period of elevated interest rates.

This outlook weighed on the stock market, causing the S&P 500 to drop by nearly 1% and the Nasdaq Composite to slump 1.5% on Sep 20, 2023.

Lesser Number of Rate Cuts Expected in 2024

The Fed’s dot plot projections unveiled the likelihood of one more rate hike in 2023, followed by two rate cuts in 2024, which is two less cuts than previously indicated in June. This would place the funds rate at around 5.1%. The projection for the fed funds rate in 2025 also rose, with the median outlook at 3.9%, up from the 3.4% expected previously.

Over the longer term, the Fed anticipates a funds rate of 2.9% in 2026, exceeding the Fed’s “neutral” interest rate, which neither bolsters nor restricts economic growth. The meeting marked the committee’s first outlook for 2026, while the long-term expected neutral rate remained at 2.5%.

Upward Revisions in Economic Growth Expectations

The Fed also revised upward its economic growth forecasts for the current year, with gross domestic product (GDP) expected to rise 2.1%, more than double the June estimate. This suggests an expectation of continued economic expansion without an imminent recession. The GDP outlook for 2024 also increased from 1.1% to 1.5%.

The expected inflation rate, as measured by the core personal consumption expenditures price index, decreased to 3.7%, down by 0.2 percentage points from June. Additionally, the unemployment outlook was revised to 3.8% compared to the previous 4.1%.

Continued Reduction in Bond Holdings

In addition to maintaining relatively high interest rates, the Fed continues to reduce its bond holdings, a process that has already reduced the central bank’s balance sheet by approximately $815 billion since June 2022. The Fed allows up to $95 billion in proceeds from maturing bonds to roll off each month without reinvesting them.

Time for High-Dividend ETFs?

While there are signs that the Fed’s approach may achieve its goal of taming inflation without causing a severe economic downturn, the road ahead is a bit unclear. Fed officials have expressed caution about declaring victory too soon.

Moreover, investors must be looking for investment avenues that can beat the benchmark U.S. treasury bond yields (i.e. 4.35% as of Sep 20, 2023). The best part of high-dividend investing is that even if there is a capital loss, a solid current income goes a long way in making up for that loss.

Below, we highlight a few high-dividend ETFs that gained on Sep 20, despite the Fed’s cues of a prolonged higher rate environment.

Alerian MLP ETF AMLP – Yield 7.60%; Up 0.62% on Sep 20

SonicShares Global Shipping ETF BOAT – Yield 15.70%; Up 0.56% on Sep 20

First Trust STOXX European Select Dividend ETF FDD – Yield 6.58%; Up 0.43% on Sep 20

Global X Variable Rate Preferred ETF PFFV – Yield 6.58%; Up 0.33% on Sep 20

Global X MSCI SuperDividend Emerging Markets ETF SDEM – Yield 7.74%; Up 0.31% on Sep 20

Franklin International Low Volatility High Dividend Index ETF LVHI – Yield 4.05%; Up 0.29% on Sep 20
Alerian MLP ETF (AMLP): ETF Research Reports

Global X MSCI SuperDividend Emerging Markets ETF (SDEM): ETF Research Reports

Franklin International Low Volatility High Dividend Index ETF (LVHI): ETF Research Reports

First Trust STOXX European Select Dividend ETF (FDD): ETF Research Reports

Global X Variable Rate Preferred ETF (PFFV): ETF Research Reports

SonicShares Global Shipping ETF (BOAT): ETF Research Reports

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Zacks Investment Research

This article originally appeared on Zacks

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