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5 Must-Buy ETFs With Fed Tightening in the Cards

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Wall Street has been on choppy ride since the start of 2022 due to rising rate worries. At the end of Feb 9, 2022, the yield on the benchmark 10-year Treasury note jumped to 1.94% from 1.81% at the start of the month. The yield on the 30-year Treasury bond increased 13 basis points from Feb 1 to 2.25%. The yield on the benchmark 2-year Treasury note surged 18 bps from the start of the month to 1.36%. Rates have been rising in the United States on faster and multiple Fed’s rate hike bets.

Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices should make Fed members comfortable with rate hikes in the coming days. Federal Reserve policy makers indicated that they are likely to enact their first interest rate hike since 2018 in their March meeting to combat sky-high inflation. As of Feb 9, 2022, CME’s FedWatch Tool said that there are 32.7% chances of 2022 closing out with 150-175 bps of rates while a 29.8% probability is there for the year to end at 125-150 bps of rate.

What Should Be Your Investing Stance?

Anemic growth in developed economies, the QE scenario and muted bond yields have kept value investing subdued in the past decade and boosted growth stocks. But the scenario is changing now. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings.

And this is where value investing rises. Value stocks perform better in a rising rate environment. Moreover, during the peak of the pandemic, value stocks were hit hard. So, now is the time for them to flourish on beaten-down valuation.

Apart from value stocks, dividends also do good in a rising rate environment, both high dividend stocks that offer benchmark-beating yields as well as dividend growth stocks that offer stability. After all, high-dividend stocks and ETFs provide investors avenues to make up for capital losses, if that happens at all. Even if the stock or the fund falls, higher current income would go a long way in protecting investors’ total returns.

Financial stocks also perform better in a rising rate environment. Talks about Fed’s rate hike in March have boosted the banking space lately. The steepening of the yield curve is a tailwind for banking stocks as these improve banks' net interest margins. This is because interest rates on deposits are usually tied to short-term rates while loans are often tied to long-term rates.

Against this backdrop, below we highlight a few ETFs that are must buys at present. All these ETFs have a Zacks Rank #1 (Strong Buy).

ETFs in Focus

Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report)

The underlying S&P 500 Enhanced Value Index tracks the performance of stocks in the S&P 500 Index that have the highest value score. SPVU charges 13 bps in fees and yields 2.21% annually. Financials, Healthcare, Industrials, IT and Consumer Staples have a double-digit weight in the fund.

iShares Russell MidCap Value ETF (IWS - Free Report)

The underlying Russell Midcap Value Index measures the performance of the mid-capitalization value sector of the U.S. equity market. IWS charges 23 bps in fees and yields 1.44% annually. Financials, Industrials, Real Estate and Consumer Discretionary have a double-digit weight in the fund.

SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report)

The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. SPYD charges 7 bps in fees and yields as high as 3.57% annually. Financials, Utilities, Real Estate, Energy, Consumer Staples and Healthcare have a double-digit weight in the fund.

iShares Core Dividend Growth ETF (DGRO - Free Report)

The underlying Morningstar US Dividend Growth Index is composed of U.S. equities with a history of consistently growing dividends. SPVU charges 8 bps in fees and yields 1.98% annually. Financials, IT, Healthcare, Industrials and Consumer Staples have a double-digit weight in the fund.

Financial Select Sector SPDR ETF (XLF - Free Report)

The underlying Financial Select Sector Index seeks to provide an effective representation of the financial sector of the S&P 500 Index. The XLF ETF charges 10 bps in fees and yields 1.56% annually (read: 3 Sector ETFs to Win Amid Rising Rates).