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4 ETFs to Ride on Fed's 50 Bps Rate Hike

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In its FOMC meeting concluded yesterday, the Federal Reserve took the most aggressive policy action in decades to combat soaring inflation. Fed Chair Jerome Powell raised interest rates by 50 bps as expected, pushing the benchmark above 0.75%. The hike marks the biggest interest-rate increase since 2000. The central bank also signaled that it would keep hiking at the same pace over the next couple of meetings.

Amid this backdrop, investors should invest in products that could prove extremely beneficial in a rising rate environment. Some of these ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , iShares US Technology ETF (IYW - Free Report) and iShares Core S&P U.S. Value ETF (IUSV - Free Report) from different corners of the market seem compelling picks.

The Fed will also reduce its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds, starting from June at an initial combined monthly pace of $47.5 billion ($30 billion in Treasuries and $17.5 billion in mortgage-backed securities). That pace of reduction will hold from June through August until September when the Fed ramps that cap up to $95 billion ($60 billion in Treasuries and $35 billion in mortgage-backed securities).

Overall, an increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans. The central bank hopes that higher borrowing costs will slow spending enough to tame inflation but will not cause a recession (read: ETF Areas to Consider as Fed Remains Super Hawkish).

The initial phase of the rate increase will be good for stocks as it will reflect an improving economy, thereby benefiting cyclical sectors like financials, technology, industrials and consumer discretionary. Banks are in the most advantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Also, insurance companies will be able to earn higher returns on their investment portfolio of longer-duration bonds.

Higher interest rates usually indicate a healthy economy, leading to greater consumer power and increased IT spending. An improving economy coupled with higher consumer confidence will make the consumer discretionary sector tempting to investors amid higher yields. Further, technology seems one of the safest sectors in a tight policy era as most companies are sitting on a huge cash pile. The cash reserves will ensure that these companies are not plagued by any financial trouble, even in a rising interest rate environment.

We have detailed five of the ETFs below:

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

SPDR S&P Regional Banking ETF provides exposure to the regional banks’ segment by tracking the S&P Regional Banks Select Industry Index. It holds 139 stocks in its basket, with each accounting for no more than 2% of the assets.

SPDR S&P Regional Banking ETF has AUM of $4.1 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 (read: Yields Hits 3% First Time Since 2018: ETFs to Gain or Lose).   

Vanguard Consumer Discretionary ETF (VCR - Free Report)

Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 305 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.

Vanguard Consumer Discretionary ETF is the low-cost choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 130,000 shares a day. The fund has managed $5.4 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #2 with a Medium risk outlook.

iShares US Technology ETF (IYW - Free Report)

iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 151 U.S. electronics, computer software and hardware, and informational technology companies.

iShares Dow Jones US Technology ETF has AUM of $7.5 billion and charges 41 bps in fees and expenses. Volume is good as it exchanges nearly 687,000 shares a day. IYW has a  Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

iShares Core S&P U.S. Value ETF (IUSV - Free Report)

iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 742 stocks in its basket, with each accounting for no more than 3.1% share. iShares Core S&P U.S. Value ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer staples occupying double-digit exposure each (read: 5 ETFs to Add Value in Your Portfolio).

iShares Core S&P U.S. Value ETF has AUM of $11.6 billion and trades in an average daily volume of 595,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.
 

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