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Fed Hike Slows Down But Set to Remain Steady: ETFs to Gain
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As expected, the Federal Reserve on Wednesday hiked its benchmark interest rate by 25 bps and gave indication that more rate hikes are in the cards as inflation remains high though is showing signs of cooling. The latest hike takes it to a target range of 4.5%-4.75%, the highest since October 2007. The move also marked the eighth increase in rates since March 2022.
“Inflation data received over the past three months show a welcome reduction in the monthly pace of increases,” Fed Chairman Jerome Powell said in his post-meeting news conference. “And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”
Powell said the Fed has not yet made a decision on the terminal rate. But markets are betting that number is closer to 4.75%. They expect the Fed to start cutting rates later this year, after one more quarter-point increase in March.
How to Play?
Value
Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties caused by high inflation and rising rates.
Value stocks perform better in a rising rate environment which we have been witnessing currently. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic activities gaining traction, now is the time for them to flourish on beaten-down valuation. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #1 (Strong Buy).
Small-Caps
Things are taking a turn for the better for the pint-sized stocks. Upbeat earnings and cheaper valuation augur well for the pint-sized stocks. Since the small-caps are more domestically-focused and do not have much foreign exposure, these are faring better on releases of decent U.S. economic indicators. Plus, as the rate hike momentum cools down, risk-on sentiments bounced back. These factors put the focus on the small-cap ETF Vanguard S&P Small-Cap 600 Value ETF (VIOV - Free Report) , which has a Zacks Rank #1.
Industrials
Industrial stocks historically yielded encouraging returns from December to May. However, industrial ETF Industrial Select Sector SPDR Fund (XLI - Free Report) has outperformed the S&P 500 this year. Biden’s huge infrastructure plan is a positive for the space. The fund XLI has a Zacks Rank #2.
Semiconductors
The semiconductor space has been surging on improving demand from data centers, PC manufacturers, and mobile phone producers, as well as China. Plus, easing inflation and hopes of a less hawkish Fed fueled the rally in the overall tech sector. Further, the introduction of expensive and new-generation chips has been leading to an enhancement in the product mix for semiconductors. Vaneck Semiconductor ETF (SMH - Free Report) is a winning bet here.
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Fed Hike Slows Down But Set to Remain Steady: ETFs to Gain
As expected, the Federal Reserve on Wednesday hiked its benchmark interest rate by 25 bps and gave indication that more rate hikes are in the cards as inflation remains high though is showing signs of cooling. The latest hike takes it to a target range of 4.5%-4.75%, the highest since October 2007. The move also marked the eighth increase in rates since March 2022.
“Inflation data received over the past three months show a welcome reduction in the monthly pace of increases,” Fed Chairman Jerome Powell said in his post-meeting news conference. “And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”
Powell said the Fed has not yet made a decision on the terminal rate. But markets are betting that number is closer to 4.75%. They expect the Fed to start cutting rates later this year, after one more quarter-point increase in March.
How to Play?
Value
Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties caused by high inflation and rising rates.
Value stocks perform better in a rising rate environment which we have been witnessing currently. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic activities gaining traction, now is the time for them to flourish on beaten-down valuation. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #1 (Strong Buy).
Small-Caps
Things are taking a turn for the better for the pint-sized stocks. Upbeat earnings and cheaper valuation augur well for the pint-sized stocks. Since the small-caps are more domestically-focused and do not have much foreign exposure, these are faring better on releases of decent U.S. economic indicators. Plus, as the rate hike momentum cools down, risk-on sentiments bounced back. These factors put the focus on the small-cap ETF Vanguard S&P Small-Cap 600 Value ETF (VIOV - Free Report) , which has a Zacks Rank #1.
Industrials
Industrial stocks historically yielded encouraging returns from December to May. However, industrial ETF Industrial Select Sector SPDR Fund (XLI - Free Report) has outperformed the S&P 500 this year. Biden’s huge infrastructure plan is a positive for the space. The fund XLI has a Zacks Rank #2.
Semiconductors
The semiconductor space has been surging on improving demand from data centers, PC manufacturers, and mobile phone producers, as well as China. Plus, easing inflation and hopes of a less hawkish Fed fueled the rally in the overall tech sector. Further, the introduction of expensive and new-generation chips has been leading to an enhancement in the product mix for semiconductors. Vaneck Semiconductor ETF (SMH - Free Report) is a winning bet here.