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Fed Hikes Rates by 0.75%: ETFs to Win

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The latest Fed meeting came across as hawkish. The Federal Reserve raised interest rates by 75 bps and hinted that it could slow the pace of its hiking campaign at some point, per a CNBC article. The decision to move by 0.75% was in line with the magnitude of the Fed’s previous action in June, which marked its largest single-meeting rate increase since 1994.

The July move marked four consecutive rate hikes in the U.S. this year. Short-term borrowing rates are now between 2.25% and 2.50%, comparable to levels in 2019. "Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Fed indicated, as quoted on Yahoo Finance.

A June reading on the labor market showed the unemployment rate at a relatively low 3.6%, almost near pre-pandemic lows. This has helped the Fed to go outright hawkish on monetary policies this year. Against this backdrop, investors can bet on the following ETFs for current income and likely capital appreciation.

Against this backdrop, investors can bet on the following ETFs for current income and likely capital appreciation.  

Value – SPDR Portfolio S&P 500 Value ETF SPYV

Though the U.S. economy has softened, jobs data and some other economic indicators still remain decent. Hence, yields are likely to see a modest but steady uptrend. Rising rates are good for value stocks than the growth ones as the latter’s cash flows come way out in the future. Thus, this group seems less valuable in a rising rate scenario as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. So, it’s better to go for mature value stocks.

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

If the yield curve steepens ahead, banking stocks may gain. Bank stocks may be up for a gain on cheap valuation. U.S. financial institutions are trading at bargain-basement prices and continue to present a solid buying opportunity despite near-term market volatility, Oppenheimer said recently as quoted on Barrons.com(read: Time for Bank ETFs on Cheaper Valuation & Decent fundamentals?).

High Dividend – 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 3.90% annually.

Floating Rate Bonds -- iShares Floating Rate Bond ETF (FLOT - Free Report)

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to the traditional bonds.

Convertible Bonds – SPDR Bloomberg Barclays Convertible Securities ETF (CWB - Free Report)

Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The fund yields 2.52% annually and charges 40 bps in fees.