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ETFs to Win & Lose on the Likely First Rate-Hike Since 2008
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All eyes are currently on the crucial two-day FOMC meeting (slated to end today) as the central bank is highly anticipated to raise the key interest rate by 25 bps, for the first time since 2018, to fight a historic surge in inflation. The move would mark an end to the central bank’s extraordinary coronavirus-era stimulus.
Several ETFs are in focus and could see outsized volume, depending on the upcoming Fed decision. A few ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) and Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) will continue to benefit if the Fed raises rates as expected, while a few such as SPDR Gold Trust ETF (GLD - Free Report) , iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) would be severely impacted.
Fed Rate Hike in the Cards!
Powell proposed a quarter-point hike instead of a half-point, indicating uncertainty related to the ongoing war. But he could move “more aggressively” if the four-decade inflation does not abate substantially. Powell called the labor market “extremely tight” and said inflation has risen well above the Fed’s 2% target. Fed watchers expect the central bank to provide a new quarterly forecast that could show as many as five or six more quarter-point hikes this year, and possibly three or four more in 2023.
Inflation has been on an incredible surge. The Consumer Price Index, the most widely used measure of inflation, reached the highest level in 40 years in February while the Producer Price Index, which tracks what America's producers get paid for their goods and services on average over time, climbed double digits last month. Meanwhile, the 30-year breakeven rate — a bond-market gauge of inflation expectations — hit 2.60% last week, the highest since 2013 (read: Inflation Beneficiary ETFs in Focus as Prices Soar).
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 137 securities in its basket.
SPDR S&P Regional Banking ETF has AUM of $5.6 billion and charges 35 bps in annual fees. It trades in an average daily volume of 12.8 million shares and has a Zacks ETF Rank #2 (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 304 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: ETFs to Watch in a Week Packed With Events).
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 161,000 shares a day. The fund has managed about $6 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #2 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 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 $891.2 million while seeing an average daily volume of around 2 million shares. It charges 78 bps in total fees and expenses and has a Zacks ETF Rank #2 (Hold) with a Medium risk outlook.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF)
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 848 securities in its basket.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF has AUM of $4 billion and trades in solid volume of nearly 890,000 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.
Gold will be hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like SPDR Gold Trust ETF will lose. It tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. SPDR Gold Trust ETF is an ultra-popular gold ETF with AUM of $67.7 billion and heavy volume of about 14 million shares a day (read: Gold Posts Best Weekly Gain in 2-Years: ETFs to Ride).
SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high-yield corner of the fixed income world is the most watched area. This is because higher rates would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. iShares iBoxx $ High Yield Corporate Bond ETF is the largest and most-liquid fund in the high-yield bond space with AUM of $15.6 billion and an average daily volume of around 41.7 million shares. It charges 48 bps in fees per year from investors.
iShares iBoxx $ High Yield Corporate Bond ETF tracks the Markit iBoxx USD Liquid High Yield Index and holds 1,318 securities in the basket. The ETF has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
A rate hike would pull out more capital from the emerging markets, stirring up concerns for most nations. The most-popular emerging market ETF — iShares MSCI Emerging Markets ETF — tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. It holds 976 securities and has AUM of $25.3 billion.
iShares MSCI Emerging Markets ETF trades in an average daily volume of more than 52.6 billion shares and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.
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ETFs to Win & Lose on the Likely First Rate-Hike Since 2008
All eyes are currently on the crucial two-day FOMC meeting (slated to end today) as the central bank is highly anticipated to raise the key interest rate by 25 bps, for the first time since 2018, to fight a historic surge in inflation. The move would mark an end to the central bank’s extraordinary coronavirus-era stimulus.
Several ETFs are in focus and could see outsized volume, depending on the upcoming Fed decision. A few ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) and Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) will continue to benefit if the Fed raises rates as expected, while a few such as SPDR Gold Trust ETF (GLD - Free Report) , iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) would be severely impacted.
Fed Rate Hike in the Cards!
Powell proposed a quarter-point hike instead of a half-point, indicating uncertainty related to the ongoing war. But he could move “more aggressively” if the four-decade inflation does not abate substantially. Powell called the labor market “extremely tight” and said inflation has risen well above the Fed’s 2% target. Fed watchers expect the central bank to provide a new quarterly forecast that could show as many as five or six more quarter-point hikes this year, and possibly three or four more in 2023.
Inflation has been on an incredible surge. The Consumer Price Index, the most widely used measure of inflation, reached the highest level in 40 years in February while the Producer Price Index, which tracks what America's producers get paid for their goods and services on average over time, climbed double digits last month. Meanwhile, the 30-year breakeven rate — a bond-market gauge of inflation expectations — hit 2.60% last week, the highest since 2013 (read: Inflation Beneficiary ETFs in Focus as Prices Soar).
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 137 securities in its basket.
SPDR S&P Regional Banking ETF has AUM of $5.6 billion and charges 35 bps in annual fees. It trades in an average daily volume of 12.8 million shares and has a Zacks ETF Rank #2 (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 304 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: ETFs to Watch in a Week Packed With Events).
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 161,000 shares a day. The fund has managed about $6 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #2 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 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 $891.2 million while seeing an average daily volume of around 2 million shares. It charges 78 bps in total fees and expenses and has a Zacks ETF Rank #2 (Hold) with a Medium risk outlook.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF)
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 848 securities in its basket.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF has AUM of $4 billion and trades in solid volume of nearly 890,000 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.
ETFs to Lose
SPDR Gold Trust ETF (GLD - Free Report)
Gold will be hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like SPDR Gold Trust ETF will lose. It tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. SPDR Gold Trust ETF is an ultra-popular gold ETF with AUM of $67.7 billion and heavy volume of about 14 million shares a day (read: Gold Posts Best Weekly Gain in 2-Years: ETFs to Ride).
SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high-yield corner of the fixed income world is the most watched area. This is because higher rates would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. iShares iBoxx $ High Yield Corporate Bond ETF is the largest and most-liquid fund in the high-yield bond space with AUM of $15.6 billion and an average daily volume of around 41.7 million shares. It charges 48 bps in fees per year from investors.
iShares iBoxx $ High Yield Corporate Bond ETF tracks the Markit iBoxx USD Liquid High Yield Index and holds 1,318 securities in the basket. The ETF has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
iShares MSCI Emerging Markets ETF (EEM - Free Report)
A rate hike would pull out more capital from the emerging markets, stirring up concerns for most nations. The most-popular emerging market ETF — iShares MSCI Emerging Markets ETF — tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. It holds 976 securities and has AUM of $25.3 billion.
iShares MSCI Emerging Markets ETF trades in an average daily volume of more than 52.6 billion shares and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.