At its most recent meeting on Wednesday, the Federal Reserve announced that it will increase its bond tapering yet again starting in January, moving up the goalposts for concluding the stimulus by the central bank, reports CNBC. Current projections have most Fed officials anticipating up to three interest rate increases next year, as its inflation outlook rose drastically for 2021.
The bond buying by the central bank will decrease by $60 billion, a $30 billion change from December and a much more aggressive rate than the $15 billion a month reduction that was started in November. It will allow the tapering process to conclude as soon as late winter or early spring next year, and will pave the way for interest rate increases, should the Fed deem them necessary; current indicators are all pointing to yes.
“Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” Chairman Jerome Powell said at his post-meeting news conference.
In the meeting, the Fed increased its inflation outlook for this year, raising it from 4.2% to 5.3% for all inflation, and 4.4% when excluding energy and food, up from 3.7%. At the same time, the unemployment rate projection was lowered to 4.3%, with job gains continuing to rebound.
Fed members are leaning heavily into the reality of interest rate increases next year; the “dot plot” for individual expectations saw only six of the 18 members anticipating less than three rises in interest rates next year. None of the members anticipate rates remaining at their current lows.
Investing for a Rising Rate Environment With EQRR
The ProShares Equities for Rising Rates ETF (EQRR) offers investors exposure to U.S. large-cap companies that outperform in environments of rising U.S. Treasury interest rates. The fund does so by focusing on sectors that have the highest correlation to the 10-Year U.S. Treasury yield and investing in the top-performing securities within those sectors in rising rate markets.
EQRR seeks to track the performance of the Nasdaq U.S. Large Cap Equities for Rising Rates Index, an index that provides outperformance during periods of rising interest rates against standard large-cap indexes.
The index pulls from a universe of 500 of the largest companies on U.S. stock exchanges and contains the top 50 of those that have a history of outperforming in times of rising interest rates or 10-Year U.S. Treasury yields. Every quarter, the index selects the five sectors that are most sensitive to interest rates at the time based on the correlation between weekly sector performance and the weekly percentage changes in the 10-Year U.S. Treasury yields over the last three years.
The sector that has the highest correlation is given a 30% weighting, the next highest is given 25%, in 5% increments all the way down to the lowest at 10%; the top 10 stocks within each sector that have the highest over and under correlation to interest rate changes are chosen. If there aren’t enough large-cap companies that qualify, mid-cap companies are pulled, and within each sector all securities are equally weighted.
EQRR carries an expense ratio of 0.35% and currently allocates 30.39% to financials, 25.38% to energy, 20.49% to basic materials, 14.31% to industrials, and 9.42% to telecommunications.
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