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All eyes are currently on the crucial two-day FOMC meeting (slated to start today) as the central bank is highly anticipated to raise interest rates for the second time this year by 50 bps to fight a historic surge in inflation. It is also expected to continue to roll off assets from its nearly $9 trillion balance sheet.
According to CME Group, markets are currently pricing in a 95% chance of another 50 bps rate hike this month. If the FOMC pulls the trigger on another 50 bps raise, the federal funds rate target rate will be between 1.25% and 1.50%.
As such, several ETFs are in focus and could see outsized volume on the Fed rate hike decision. A few ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) and Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF - Free Report) will continue to benefit if the Fed raises rates as expected.
The latest inflation data, which showed that U.S. consumer prices climbed at the fastest rate since 1981, has raised the bets over the aggressive interest rates hike in the coming months. In fact, this has intensified fears that the drive of Fed’s monetary tightening could tip the economy into a recession. The CME Group data shows that there is an 85% probability that the Fed will raise its benchmark short-term interest rate by at least 2.5 percentage points by the end of the year from its current range between 0.75% and 1% (read: 5 Sector ETFs to Play Robust May Jobs Data).
Currently, the U.S. economy is in good shape. It added 390,000 jobs in May, the least since April last year but above market forecasts of 325,000. The unemployment rate was at 3.6%, just above the lowest level since December 1969. Average hourly earnings increased 0.3% from April, bringing year-over-year increase of 5.2%. Additionally, manufacturing activity picked up in May as demand for goods remains strong, which could further allay fears of an imminent recession.
A rising interest rate scenario would be highly profitable for banks as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. In particular, the ultra-popular SPDR S&P Regional Banking ETF will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 138 securities in its basket.
SPDR S&P Regional Banking ETF has AUM of $3.5 billion and charges 35 bps in annual fees. It trades in an average daily volume of 11 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.
Higher interest rates usually indicate a healthy economy, leading to greater consumer power. An improving economy coupled with higher consumer confidence will make the consumer discretionary sector tempting to investors amid higher yields. Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 303 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail and automobile manufacturers occupy the top spots with double-digit exposure each (read: Will ETFs Suffer as US Consumer Confidence Dips in May?).
Vanguard Consumer Discretionary ETF is the low choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 165,000 shares a day. The fund has managed about $5 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 with a Medium risk outlook.
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. Invesco DB US Dollar Index Bullish Fund is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies — euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.
Invesco DB US Dollar Index Bullish Fund has so far managed an asset base of $1.7 billion while seeing an average daily volume of around 2.7 million shares. It charges 78 bps in total fees and expenses and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
The strength in dollar would knock down the returns of international investments and thus raise the appeal for currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, Deutsche X-trackers MSCI EAFE Hedged Equity ETF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 828 securities in its basket (read: Time for Currency-Hedged International ETFs?).
Deutsche X-trackers MSCI EAFE Hedged Equity ETF has AUM of $4.2 billion and trades in a solid volume of nearly 940,000 shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
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ETFs to Watch Ahead of Fed Meeting
All eyes are currently on the crucial two-day FOMC meeting (slated to start today) as the central bank is highly anticipated to raise interest rates for the second time this year by 50 bps to fight a historic surge in inflation. It is also expected to continue to roll off assets from its nearly $9 trillion balance sheet.
According to CME Group, markets are currently pricing in a 95% chance of another 50 bps rate hike this month. If the FOMC pulls the trigger on another 50 bps raise, the federal funds rate target rate will be between 1.25% and 1.50%.
As such, several ETFs are in focus and could see outsized volume on the Fed rate hike decision. A few ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) and Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF - Free Report) will continue to benefit if the Fed raises rates as expected.
The latest inflation data, which showed that U.S. consumer prices climbed at the fastest rate since 1981, has raised the bets over the aggressive interest rates hike in the coming months. In fact, this has intensified fears that the drive of Fed’s monetary tightening could tip the economy into a recession. The CME Group data shows that there is an 85% probability that the Fed will raise its benchmark short-term interest rate by at least 2.5 percentage points by the end of the year from its current range between 0.75% and 1% (read: 5 Sector ETFs to Play Robust May Jobs Data).
Currently, the U.S. economy is in good shape. It added 390,000 jobs in May, the least since April last year but above market forecasts of 325,000. The unemployment rate was at 3.6%, just above the lowest level since December 1969. Average hourly earnings increased 0.3% from April, bringing year-over-year increase of 5.2%. Additionally, manufacturing activity picked up in May as demand for goods remains strong, which could further allay fears of an imminent recession.
ETFs to Win
SPDR S&P Regional Banking ETF (KRE - Free Report)
A rising interest rate scenario would be highly profitable for banks as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. In particular, the ultra-popular SPDR S&P Regional Banking ETF will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 138 securities in its basket.
SPDR S&P Regional Banking ETF has AUM of $3.5 billion and charges 35 bps in annual fees. It trades in an average daily volume of 11 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.
Vanguard Consumer Discretionary ETF (VCR - Free Report)
Higher interest rates usually indicate a healthy economy, leading to greater consumer power. An improving economy coupled with higher consumer confidence will make the consumer discretionary sector tempting to investors amid higher yields. Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 303 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail and automobile manufacturers occupy the top spots with double-digit exposure each (read: Will ETFs Suffer as US Consumer Confidence Dips in May?).
Vanguard Consumer Discretionary ETF is the low choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 165,000 shares a day. The fund has managed about $5 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 with a Medium risk outlook.
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. Invesco DB US Dollar Index Bullish Fund is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies — euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.
Invesco DB US Dollar Index Bullish Fund has so far managed an asset base of $1.7 billion while seeing an average daily volume of around 2.7 million shares. It charges 78 bps in total fees and expenses and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF - Free Report)
The strength in dollar would knock down the returns of international investments and thus raise the appeal for currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, Deutsche X-trackers MSCI EAFE Hedged Equity ETF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 828 securities in its basket (read: Time for Currency-Hedged International ETFs?).
Deutsche X-trackers MSCI EAFE Hedged Equity ETF has AUM of $4.2 billion and trades in a solid volume of nearly 940,000 shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.