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How to Play Fed's Fourth 75-Bp Rate Hike With ETFs?

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As expected, the Federal Reserve boosted its benchmark interest rate by three-quarters of a point this week for a fourth straight time but indicated that it could soon reduce the size of its rate hikes. Fed Chair Jerome Powell reiterated the central bank's commitment to hike rates further in order to tame multi-decade highs in inflation.

The Fed’s latest move raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. November’s move marked the U.S. central bank’s sixth rate hike this year. The central bank also signaled that future increases in borrowing costs could be made in smaller steps to account for the “cumulative tightening of monetary policy” it has enacted so far.

Future move was also expected in the market. Market watchers believe that the Fed’s next expected rate hike in December may be only a half-point rather than three-quarters. Per CME FedWatch Tool, likelihood of a 50-bp rate hike in December is 52% now while rest expects a 75-bp rate hike.

How to Play?


Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets, per a Wall Street Journal article. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties caused by high inflation and rising rates.

Value stocks perform better in a rising rate environment which we have been witnessing currently. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #1 (Strong Buy).              


Now, who can overlook consumer discretionary ETFs at this point of the year, especially with events like Thanksgiving, Black Friday and Cyber Monday lined up? The National Retail Federation expects holiday season sales to increase between 10% and 12% to between $262.8 billion and $267.6 billion. This figure is up from $238.9 billion last year. Moreover, retail is a cyclical industry and often fares better in rising rate environment. Our pick for the busy holiday season is Zacks Rank #2 (Buy) SPDR S&P Retail ETF (XRT - Free Report) (read: Can ETFs Enjoy Halloween Effect Despite Rising Rate Fear?).


This is a tricky space. The Halloween Effect on Russell 2000 was a gain of 494% versus 373% offered by the S&P 500 from February 1993 through 2010-end. Plus, small-cap securities have historically proven their outperformance in January. Plus, if the Fed enacts softer rate hike in December, risk-on sentiments should bounce back. These factors put the focus on the small-cap ETF SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report) , which has a Zacks Rank #2.


Industrial stocks historically yielded encouraging returns from December to May. However, industrial ETF Industrial Select Sector SPDR Fund (XLI - Free Report) has outperformed the S&P 500 this year. Biden’s huge infrastructure plan is a positive for the space. Notably, production levels at U.S. factories rose for the third straight month in September, driven by growth in manufacturing activity, which has been bolstered by higher demand for consumer goods. The fund XLI has a Zacks Rank #2.


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