Prior to the Federal Reserve cutting interest rates last week, there was a record amount of cash residing in money market funds. That tally stood at more than $6.3 trillion, according to Investment Company Institute (ICI) data published earlier this month.
As expected, those rate cuts sparked some departures from money market funds. Investors yanked $7.5 billion from those instruments as of last Wednesday, according to EPFR data. Obviously, there’s much more that investors could pull from money markets and dividend stocks. ETFs could absorb some of that cash. That could benefit the ALPS O’Shares U.S. Quality Dividend ETF (OUSA ).
OUSA sported a trailing 12-month dividend yield of 1.66% as of Sept. 20 and while that’s still well below what money markets offer, cash instruments are vulnerable to declining interest rates. Conversely, people view dividend equities and ETFs such as OUSA as beneficiaries of monetary easing by the Fed.
OUSA Deserves a Look
The Fed lowered rates by 50 basis points last week and some market observers believe the central bank’s benchmark lending rate will decline by another 100 basis points by the second quarter of next year. Should that outlook prove accurate or be exceeded, cash instruments such as money markets would continue losing appeal.
“The shift coincides with the Federal Reserve’s half percentage-point interest rate cut last week. The data capture moves investors made ahead of the decision and shortly after. Expectations are high that more cuts will follow when policymakers meet, in November and December. Treasury bills and CDs have been offering returns of below 5% for a few months now, making it less attractive to hold lots of money in cash,” reported Karishama Vanjani for Barron’s.
Data confirm investors are already finding their way back to dividend funds. Last week, those vehicles saw their largest week of inflows in six months, according to Barron’s. Should that trend continue, some of that capital could make its way to OUSA.
Another advantage offered by OUSA is its quality tilt. As noted above, its dividend yield isn’t particularly high – the result of not having exposure to high-yielding sectors such as real estate and utilities. While those are rate-sensitive groups, OUSA makes up for lack of exposure to those sectors by leaning steady dividend growth names, some of which are also devoted buyers of their own shares.
“Buybacks typically boost share prices. As corporate earnings rise, gross buybacks by companies in the S&P 500 could hit about $1.2 trillion next year, up from the current annual run rate of $1 trillion,” Barron’s reported citing Deutsche Bank data.
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