The Federal Reserve’s loose monetary policies marked by rate cuts and liquidity injections have jacked up stock prices, but have also created a very dangerous landscape that will be difficult to trek once investors realize the underlying economy remains soft, said Steve Cortes, a daily contributor on CNBC and expert on global financial markets.

The Fed recently announced plans to buy $40 billion in mortgage-backed securities held by banks every month until the economy and labor market improve, a monetary policy tool known as quantitative easing (QE).

The announcement marks the third time the Fed has rolled out QE measures to jolt the economy under Fed Chairman Ben Bernanke, with the first round seeing the Fed snap up $1.7 trillion in mortgage securities and the second round seeing the Fed buy $600 billion in Treasury securities held by banks.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

QE aims to stimulate the economy by injecting the financial system full of liquidity via bond purchases in a way that pushes down interest rates to encourage investing and hiring.

Side effects to juicing the economy in such a manner include a weaker dollar, rising stock and commodity prices and according to most critics, mounting inflationary pressures, which could be very dangerous if the measure fails to fuel more robust economic recovery.

“The Fed has created, through its loose money policies, a very dangerous investing landscape,"  Cortes told Newsmax TV in an exclusive interview. "It has certainly been very successful at elevating asset prices, particularly stocks. We haven’t seen a whole lot of movement in real estate, but we have seen stocks and commodities rally amazingly well since the ’09 low,” Cortes said.

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“But has the Fed moved the needle on the real economy? I would argue that it really has not. And, in fact, it may be doing a very large bit of damage by this kind of central planning …, which all you’re doing by that kind of loose money policy is borrowing from future spending,” Cortes added.

That sets markets up for what Cortes describes as a “serious reckoning,” meaning investors should be ready for volatility when the Fed’s sugar high wears off.

“I am cautioning investors, although it has been a wonderful three, four year run now in equity markets, there’s a lot of risk because the second that Fed punchbowl gets taken away from the party, there’s going to be a brutal hangover,” said Cortes, the author of "Against the Herd."

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In the meantime, investors should pick and choose exchange-traded funds (ETFs) that best suit their investment strategies.

Cortes has developed his signature Cortes ETF Ladder, which shows ETFs as being viewed either bullishly, bearishly or neutrally, giving investors a color-coded guide to own, avoid or short these assets.

Look at the Ladder — those ETFs listed in green you should own, yellow you should avoid and red you should short.

The Ladder gives individual investors a weather vane to guide them when picking among the available ETFs.

Thanks to Fed policies, interest rates are very low and that makes it hard for many investorsto generate investment income, especially those who depend on such a revenue stream to live.

Meanwhile, Asian economies are cooling their once red-hot growth rates, while Europe remains mired in uncertainty thanks to its ongoing debt crisis.

ETFs, however, can prove to be a valuable investment amid such uncertainty, especially those that focus on companies with healthy exposure to the United States and pay dividends.

Take utilities, for example.

“I’m focusing with my own capital much more on domestic U.S. names that are not terribly exposed to those international themes. So, utilities really hit me on both of those fronts,” Cortes said.

“Utilities, almost by definition, are domestic because we export extremely little energy and power. And, on the other front, in terms of dividend yields, there are a host of utilities that are paying 4 to 5 percent and sometimes even 6 percent dividend yields.”

There’s an ETF for just such a sector — the Utilities Select Sector SPDR (XLU).

“The XLU for the longer-term investors is a great ETF vehicle to get exposure to the broad world of utilities.”

Meanwhile, with the U.S. 10-year Treasury providing yields of less than 2 percent, investors are looking toward other fixed-income venues.

Enter the iShares iBoxx $ Invest Grade Corp Bond (LQD) ETF.

“The LQD is only investment-grade — very highly rated companies by Wall Street that pay substantial corporate bonds,” he said.

“This is a corporate bond ETF. It’s had an incredible run lately. This LQD has rallied hugely over the last couple of months, but there’s still more to go there. That is a way, if you’re not satisfied with earning 1.75 percent on a 10-year Treasury and knowing that it’s absolutely risk-free, the next best thing is highly rated corporate bonds.”

Meanwhile, investors should approach ETFs boasting very high yields with caution.

Many are leveraged ETFs that often magnify the returns a standard ETF would by using what their name suggests — leveraged money.

“Leveraged ETFs are only appropriate for the most sophisticated investors,” Cortes cautioned.

“Regular folks who have a portfolio and are looking for long-term, dependable growth should avoid those kinds of ETFs.”

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