ETFs To Watch Ahead Of Key FOMC Meeting

key level to watchAll eyes are currently on the crucial FOMC meeting this week, as the pullback in the easy monetary policy is just around the corner. Investors wait with bated breath to see whether the Fed finally trims its $85 billion in monthly bond purchases this time around.

In a recent Wall Street Journal poll of 46 economists, only one-fourth believes that the taper will begin this week while one-third expect the announcement in January. More than one-third of economists, however, expect the Fed to hold off on the taper until the March 2014 meeting.

The likelihood of Fed tapering has increased in the recent weeks given the slew of upbeat data and economic improvement. The first and foremost driver is the healing labor market. The economy has created 193,000 jobs in the past three months and the unemployment rate has declined gradually. The rate is currently at a five-year low of 7%.

Retail sales rose 0.7% last month buoyed by strong consumer confidence and spending while the manufacturing sector also showed strong signs of acceleration as well.

Additionally, the congressional Democrats and Republicans are on the verge of a tentative two-year budget deal, which if approved, would end the fiscal instability in Washington. This suggests a much stronger U.S. economic outlook heading into 2014.

Other positive developments in the economy include a solid housing recovery and higher-than expected GDP growth in the third quarter. However, inflation remained near the historical low at 1.1% in November, well below the central bank’s 2% target. This might stop the Fed from QE tapering.

Given the large uncertainty in the Fed’s stimulus program this week, investors should pay close attention to the income-investing corner of the world that could see heavy trading when the announcement is finally made (read: High Dividend ETFs to Buy Even If the Fed Tapers).

As yields continue to rise, many investors remain concerned about the income-generating securities in their portfolio. Below, we have highlighted three such sectors that would be in focus and look to be big movers from the upcoming Fed decision:

Mortgage REITs

Thanks to soaring mortgage rates, mortgage REITs have been under immense pressure and could be in more trouble if the Fed starts scaling back its bond purchase program. Both 30-year and 15-year mortgage rates again climbed to 4.42% and 3.43%, respectively.

With the taper announcement, short-term rates would rise faster than the long-term rates thereby leading to a tight spread and lower profits for mREIT companies. Meanwhile, if the Fed refrains from tapering in this meeting, we could see a rebound in this space.

Investors could play this rebound in two ways: iShares FTSE NAREIT Mortgage Plus Capped Index Fund (NYSEARCA:REM) and Market Vector Mortgage REIT Income ETF (NYSEARCA:MORT). Though both are popular, REM has more AUM and volume while MORT is a cheaper choice. Further, REM has a higher 30-Day SEC yield of 13.39% while MORT yields 11.22%.

From a year-to-date look, REM and MORT lost nearly 6% and 3%, respectively, but could rise if tapering is again stalled (read: Mortgage REIT ETFs in Focus on Renewed Taper Concerns).

Bonds

Bond mutual funds and ETFs have seen massive outflows this year as their prices persistently slid on taper concerns. According to Trim Tabs Investment Research, total bond funds shed $70.7 billion so far this year through the first week of December, edging past the annual record outflow of $62.5 billion in 1994.

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