Although the latest 50-basis-point interest rate hike marked a decline from the 75-basis point rate hikes for four consecutive times, the Federal Reserve expects the benchmark rates to peak at about 5.1% in 2023. With the central bank intending to keep raising interest rates through 2023, the stock market will likely remain under pressure.
James Demmert, the chief investment officer at Main Street Research, has urged investors to remain cautious as recessionary fears linger. He stated, “The Fed would like inflation to settle at 2%, and it’s hard to imagine that happening without a recession and much higher unemployment.”
On the other hand, cooled inflation for two straight months raised hopes of a soft landing. Given this uncertain backdrop, exposure to bonds and dividends could help investors protect their portfolios against downside risk.
Therefore, under-$50 ETFs First Trust Low Duration Opportunities ETF (LMBS), SPDR Nuveen Bloomberg Short Term Municipal Bond ETF (SHM), and First Trust Value Line Dividend Index Fund (FVD) could be wise investments now.
First Trust Low Duration Opportunities ETF (LMBS)
LMBS invests at least 60% of its net assets (including investment borrowings) in mortgage-related debt securities and other mortgage-related instruments. The fund is actively managed and aims to generate current income with a secondary objective of capital appreciation.
LMBS has a NAV of $47.77 and $4.70 billion in total net assets. Its expense ratio of 0.66% compares with the category average of 0.31%. The fund’s trailing-12-month dividend of $1.00 yields 2.09% on the current share price. It has a four-year average yield of 2.31%.
As of December 19, the fund’s top holdings include Fannie Mae or Freddie Mac TBA, 3%, due 05/01/2052, with a 2.55% weight, U.S. Treasury Note, 1.50%, due 03/31/2023, with a 2.53% weight, and Fannie Mae or Freddie Mac TBA, 3.50%, due 06/01/2052, with a 2.27% weight.
Its net inflows came in at $1.29 billion over the past three years and $4.24 billion over the past five years. The fund has gained marginally over the past month to close its last trading session at $47.72. It has a five-year beta of 0.30.
LMBS’ strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
LMBS has a Trade, Buy & Hold, and Peer grade of A. In the 49-ETF Intermediate-Term Bond ETFs group, it is ranked #2. The group is rated B.
Click here to see the POWR Ratings for LMBS.
SPDR Nuveen Bloomberg Short Term Municipal Bond ETF (SHM)
SHM, tracking the Bloomberg Managed Money Municipal Short Term Index, offers exposure to the publicly traded municipal bonds that cover the U.S. dollar-denominated short-term tax-exempt bond market. SHM provides a choice for investors seeking broad exposure to the muni market but with lower levels of risk.
SHM has $4.54 billion in assets under management and a $46.97 NAV. Its gross expense ratio of 0.20% is lower than the category average of 0.30%. Its trailing-12-month dividend of $0.32 yields 0.69% on the prevailing prices. It has a four-year average yield of 1.13%.
The fund’s top holdings include ORATRN 5.000 10/15/24, with a 1.66% weight, NYCUTL 5.000 06/15/26, with a 1.12% weight, and CAS 5.000 10/01/26, with a 0.99% weight. SHM’s net inflows came in at $1.06 billion over the past three years and $1.20 billion over the past five years.
The ETF has gained marginally over the past three months to close its last trading session at $47.02. It has also gained marginally over the past month. It has a five-year beta of 0.45.
It’s no surprise that SHM has an overall A rating, which translates to a Strong Buy in our POWR Ratings system.
The fund has an A grade for Trade, Buy & Hold, and Peer. It is ranked #2 out of 66 ETFs in the Municipal Bonds ETFs group. The group is rated A.
To see the POWR Ratings for SHM, click here.
First Trust Value Line Dividend Index Fund (FVD)
Tracking the Value Line Dividend Index, FVD allows investors to access stocks of dividend-paying companies. The index seeks to measure the performance of the securities ranked #1 or #2 according to the index provider's proprietary Value Line Safety Ranking System, which is expected to provide an above-average dividend yield.
FVD has a $39.79 NAV and $12.40 billion in net assets. It has an expense ratio of 0.67%, compared to the category average of 0.48%. Its trailing-12-month dividend of $0.79 yields 1.99% on current prices. Its dividend payments have grown at a 5.1% CAGR over the past five years.
As of December 19, FVD’s top holdings include Maximus, Inc. (MMS), with a 0.67% yield, Cal-Maine Foods, Inc. (CALM), with a 0.66%, and Campbell Soup Company (CPB), with a 0.63% weight. Its net inflows came in at $479.36 million over the past year and $30.44 million over the past month.
The fund has gained 6.8% over the past six months and 3.3% over the past three months to close its last trading session at $39.77. It has a five-year beta of 0.82.
FVD’s promising prospect is reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
The fund has a Trade and Peer grade of A and a Buy & Hold grade of B. In the 86-ETF Large Cap Value ETFs group, it is ranked #5. The group is rated A.
Click here to access the POWR Ratings for FVD.
LMBS shares were unchanged in premarket trading Wednesday. Year-to-date, LMBS has declined -2.69%, versus a -17.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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