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Fed Raises Rates by 75 bps: ETFs Set to Surge

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In its FOMC meeting concluded yesterday, the Federal Reserve announced the biggest interest-rate increase since 1994 to quell four-decade high inflation. Fed Chair Jerome Powell raised interest rates by 75 bps, pushing the federal funds rate between 1.5% and 1.75%. The move has rekindled investors’ interest in the stock market as the Fed’s move restored confidence that it is serious about fighting inflation.

Amid this backdrop, investors should consider 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 central bank seeks to fight rising inflation without sparking a recession. Traders pared bets for tightening next month and are no longer fully pricing a three-quarter point move. Barclays Plc, which was among the first major banks to shift its Fed prediction for June to a 75-basis-point hike, said it anticipates the central bank will return to the 50-bps hike pace in July.

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: 5 ETFs Surge As S&P 500 Slips to Bear Market).

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 four 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 138 stocks in its basket, with each accounting for no more than 2% of the assets.

SPDR S&P Regional Banking ETF has AUM of $3 billion and charges 35 bps in annual fees. It trades in an average daily volume of 10.8 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High-risk outlook.   

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 324 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: US Consumer Sentiment Dips in June: Will ETFs Suffer?).

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 172,000 shares a day. The fund has managed $4.2 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 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 $6.3 billion and charges 41 bps in fees and expenses. Volume is good as it exchanges nearly 656,000 shares a day. IYW has a  Zacks ETF Rank #2 (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 a 3% 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 Value ETFs to Buy Now for Outperformance).

iShares Core S&P U.S. Value ETF has AUM of $11 billion and trades in an average daily volume of 651,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.