A 25-bp Fed Rate Cut Already Baked in on Wall Street? ETFs to Play

Market watchers anticipate that the Fed will cut interest rates by 25 basis points today, with futures pricing in a 96.1% chance of such a move, at the time of writing (per CME FedWatch Tool). There is a 3.9% probability of a larger, 50-basis-point reduction. The bets over rate cuts heightened amid a softer labor market.

Retail Sales Stronger Than Expected

While several economic data points came in at weaker-than-expected this week, U.S. retail sales rose 0.6% in August, way higher than the 0.2% forecast, as quoted on Yahoo Finance. The data shows that consumers are still spending despite inflationary pressures and labor market weakness. The back-to-school shopping season probably led to the gains (read: How to Play Back-to-School Season With ETFs & Stocks).

Consumers Still Seek Value

Despite resilient spending, shoppers remain cautious. In an interview with Yahoo Finance, Best Buy BBY CEO Corie Barry noted that customers are increasingly looking for great deals and value, as quoted in the above-mentioned Yahoo Finance article.

Is the Fed Rate Cut Probability Already Baked In?

This week’s highly likely rate cut move is already priced in. With key indexes rallying for the past few weeks, no significant northbound movement is expected after the announcement of the Fed rate cut. The focus now will be upon the forward guidance; the Fed’s dot plots and Powell’s comments that will decide the fate of the future market rally.

Time for Option Income ETFs?

Per Charles Schwab, Options Income exchange-traded funds (ETFs) use covered option strategies to generate high yields and provide a cushion against volatility. These actively managed funds invest in assets like stocks, bonds, Treasuries, commodities, REITs, or even cryptocurrencies, and sell options to collect premiums, which are then paid out to investors.

Their main criterion is steady income generation in a simple ETF format, along with potential volatility reduction and decent growth. However, they also carry risks. These are not tax-efficient in most cases, and involve higher fees due to their actively-managed nature. Also, there is the capping of upside potential.

Time for Lower-Risk Higher-Income ETFs?

With the value quotient still alive in the market and investors fearing uncertainty, it is better to focus on high income ones. Below, we have highlighted a few of such ETFs.

Global X Nasdaq 100 Covered Call ETF QYLD

A covered call strategy is an investing technique that saves one from market selloffs to a large extent. The strategy involves holding a long position in a stock and selling call options on it to generate additional income.

The underlying CBOE NASDAQ-100 BuyWrite V2 Index measures the total return of a portfolio consisting of common stocks of the 100 companies included on the NASDAQ-100 Index and call options systematically written on those securities through a buy-write or covered call strategy. The fund charges 60 bps in fees and yields 13.13% annually.

Amplify CWP Enhanced Dividend Income ETF DIVO

The Amplify CWP Enhanced Dividend Income ETF seeks to deliver both dividend and option income to investors on a monthly basis. The fund charges 56 bps in fees and yields 4.57% annually.

JPMorgan Equity Premium Income ETF JEPI

The ETF’s equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings. Disciplined options overlay implements written out-of-the-money S&P 500 Index call options that seek to generate distributable monthly income. The fund charges 35 bps in fees and yields 8.41% annually. 

S&P 500 Covered Call ETF XYLD

The underlying Cboe S&P 500 BuyWrite Index seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The fund charges 60 bps in fees and yields 13.05% annually.

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This article originally published on Zacks Investment Research (zacks.com).

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