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5 Financial ETFs to Buy As Fed Signals Sooner Rate Hike

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The Fed has signaled a hawkish stance in its latest FOMC meeting though it has kept interest rates near zero. The central bank officials surprisingly raised the chances of two rate hikes by the end of 2023, sooner than the previously projected 2024.

Per an FOMC statement, the progress on vaccinations has reduced the spread of COVID-19 in the United States, and economic activity and employment have strengthened. The sectors most adversely affected by the pandemic have shown improvement but are still weak. Inflation has also risen though the Fed views this as temporary.

The central bank expects inflation to run hot this year to 3.4%, well above the goal of 2%, before receding to 2.1% in 2022. It also raised GDP growth from 6.5% to 7% for this year, the fastest calendar-year expansion since 1984. The unemployment rate remained unchanged at 4.5% as the labor market is still healing from the depths of the pandemic and has yet to recover 7 million jobs (read: Core Inflation at 29-Year High: 6 ETF Areas to Benefit).

Further, the central bank gave no indication about the scaling back of the aggressive bond-buying program. It is currently buying $80 billion worth of Treasury securities and $40 billion worth of mortgage-backed securities per month to recover from the coronavirus pandemic.

The rate-hike prediction pushed Treasury yields higher and is expected to benefit the financial sector. Notably, the financial sector is a major beneficiary of a rising interest rate environment. This is because the steepening yield curve bolsters profits for banks, insurance companies, discount brokerage firms and asset managers.

Additionally, accelerating economic growth, a strengthening job market, growing consumer confidence and a solid housing market may lead to higher demand for loans and all types of financial services. Further, rising oil prices will act as catalysts given that most banks are highly exposed to the energy sector. Moreover, the upside to the finance sector is confirmed by the Zacks Sector Rank in the top 38%, which suggests outperformance in the coming months.

Given this, investors should tap the bullishness in the sector via ETFs. While there are a number of ETFs in this corner of the market, we have highlighted those that have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy).

Financial Select Sector SPDR Fund (XLF - Free Report)

This ultra-popular financial ETF seeks to provide exposure to 65 companies in the diversified financial services, insurance, banks, capital markets, mortgage real estate investment trusts (REITs), consumer finance, and thrifts and mortgage finance industries. The product has AUM of $43.8 billion and charges 12 bps in annual fees. It trades in an average daily volume of 44.1 million shares and has a Zacks ETF Rank #1 (read: Record Inflows to U.S. ETFs This Year: 6 Winners).

Vanguard Financials ETF (VFH - Free Report)

With AUM of $10.8 billion, this fund provides exposure to a basket of 424 stocks by tracking the MSCI US Investable Market Financials 25/50 Index. Diversified banks account for 24.7% of the portfolio, followed by regional banks (14.9%), asset management & custody banks (9.2%) and investment banking & brokerage (8.5%). The product sees a solid volume of 596,000 shares and charges 10 bps in annual fees. It has a Zacks ETF Rank #2.

SPDR S&P Regional Banking ETF (KRE - Free Report)

This product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. It is one of the largest and most-popular ETFs in the banking space with AUM of $5.2 billion and an average daily volume of 7.6 million shares. Holding 133 securities in its basket, the fund carries a Zacks ETF Rank #2.

SPDR S&P Bank ETF (KBE - Free Report)

This fund offers equal-weight exposure to 95 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 72.8% share while thrifts & mortgage finance, diversified banks, asset management & custody banks and other diversified financial services take the remainder. It has amassed $3.4 billion in its asset base while trading in a heavy volume of 2.4 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (read: Top-Ranked Banking ETFs to Bet on Now).

iShares U.S. Financials ETF (IYF - Free Report)

This ETF offers exposure to U.S. banks, insurers, and credit card companies by tracking the Dow Jones U.S. Financials Capped Index. It holds 231 stocks in its basket with key holdings in diversified financials, banks, real estate and insurance. The fund has amassed $2.4 billion in its asset base and charges 42 bps in annual fees. It has a Zacks ETF Rank #2.

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