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Great Rotation From Bonds to Stocks: ETFs to Win

Wall Street has been in the pink over the past few months on a super-easy monetary policy, fiscal stimulus and most importantly vaccine optimism since the fourth quarter of 2020. No wonder, the S&P 500 is up 24.1% in the past six months.

Low rates mainly drove the market last year but bonds too stood out with their performance. iShares iBoxx $ Investment Grade Corporate Bond ETF LQD is off only 2.6% in the past six-month frame, that too with major crashes coming in this year.

Notably, the investing scenario changed totally as we entered 2021 as vaccine distribution and hopes of a hefty fiscal stimulus in the United States under the Biden administration boosted reflationary trade, favored value stocks over growth ones and triggered a widespread bond selloff.

The reason was a sudden jump in benchmark U.S. treasury yield, which topped 1.6% lately, marking the highest level since February 2020. The strong risk-on trade sentiments caused this movement. Understandably, investment firms including BlackRock Inc.’s research arm and Aberdeen Standard Investments are withdrawing from government bonds.

Strategists have reworked on their end-2021 forecasts at the fastest pace in two years, per a Bloomberg article. From Australia to the United States, yield curves are now the steepest in years, indicating a faster-than-expected pickup in global growth.

Global government bonds are down 2.44% this year, according to a Bloomberg index, the worst annual start in eight years. Growing bets against global treasuries by the investment houses makes the case for a great rotation from bonds to equities stronger.

Time for Great Rotation?

Bonds had seen their share of highs last year thanks to growth worries. Now, one should prepare a portfolio for economic reopening. More and more companies are coming up with vaccines. Though new variants of the COVID-19 have hit the globe in recent months, researches are ongoing to tackle the crisis.

Some epidemiologists also believe that it is “possible” the United States is approaching herd immunity as COVID-19 infections are down 77% in six weeks. U.S. consumer confidence also reached a three-month high level in February.

iShares 20+ Year Treasury Bond ETF TLT has lost about $3.10 billion in assets this year whileSPDR S&P 500 ETF Trust SPY has amassed about $6.69 billion. Let’s find out which equity ETFs could be rewarding at the current level.

ETF Picks

iShares U.S. Regional Banks ETF IAT

As regional banks fare well in a steepening yield curve environment, IAT has chances of gaining ahead. The underlying Dow Jones U.S. Select Regional Banks Index of the fund is a free-float adjusted market capitalization-weighted index, which measures the performance of the regional bank sub-sector of the U.S. equity market.

SPDR Portfolio S&P 500 Value ETF (SPYV)

While growth stocks prevailed in 2020 on low rates, the rising rate trend should benefit the value ones, Hence, we expect SPYV to return better than the broader S&P 500 Index ETF SPY in the near term.

Invesco Dynamic Leisure and Entertainment ETF (PEJ)

This is a great value ETF as it got severely hurt in the pandemic a lot. Americans are increasingly planning vacations after almost a year-long lockdown. This reopening-friendly fund should rebound in 2021.

iShares Russell 2000 ETF (IWM)

The segment is likely to benefit once the fiscal stimulus enters the economy. This, in turn, would benefit small-cap ETFs as these are heavily dependent on domestic companies and consumers.

Vanguard High Dividend Yield Index Fund ETF Shares VYM

With the 10-year Treasury yield approaching the S&P 500 dividend, income-loving investors would definitely look for other better options. VYM yields 3.00% currently. Plus, the dividend payout scenario has also improved within corporate America (read: ETFs to Win/Lose Amid Rising Inflationary Bets).

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iShares 20 Year Treasury Bond ETF (TLT): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
iShares iBoxx Investment Grade Corporate Bond ETF (LQD): ETF Research Reports
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