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ETFs to Watch in This Fed and Inflation Busy Week

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This week has been crucial for U.S. stocks, given the double dose of market-moving events like the inflation report and Fed meeting that will set the tone for the rest of 2022 and beyond. As such, investors should keep a close eye on ETFs that are most exposed to these events.

Some of the ETFs include SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Real Estate ETF (VNQ - Free Report) , Utilities Select Sector SPDR (XLU - Free Report) , Vanguard Energy ETF (VDE - Free Report) , and Vanguard Value ETF (VTV - Free Report) .

Banks will be in the most advantageous position when Fed hikes the rate 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. Meanwhile, rate-sensitive sectors such as utilities and real estate will be highly in focus, given their sensitivity to interest rates.

Energy stocks perform well in high-inflationary environments and are currently struggling with declining oil prices. Amid the volatility, value products seem to be good choices. Value stocks have strong fundamentals — earnings, dividends, book value and cash flow — but trade below their intrinsic value. These have the potential to deliver higher returns and exhibit lower volatility than their growth and blend counterparts.

Inflation Data

Consumer price data for November is due this week. Economists expect the consumer price index (“CPI”) rose 0.3% last month, a marginal deceleration from the 0.4% increase seen in October, per Bloomberg. On an annual basis, CPI likely rose 7.3% in November, down from the 7.7% recorded a year earlier.

The consumer price index rose 7.7% annually in October after rising 8.2% at the end of September, while the core consumer price index, which strips out volatile components such as food and energy prices, climbed 6.3% year over year, down from 6.6% in September. Annual inflation slipped below 8% for the first time in eight months. The data renewed optimism about the Fed’s possibility of slowing its pace of rate hike in 2023 (read: 4 Sector ETFs to Win from October Inflation Data).

Fed Meet

However, hopes of slow tightening diminished with the latest round of solid data. U.S. producer price rose more than expected in November, with the producer price index climbing 0.3% for the third month and was up 7.4% from a year-ago month. A stronger-than-expected November report on producer prices aggravated fears about the Federal Reserve’s interest rate hikes, following a stronger-than-expected November jobs report and a strong services sector report.

The economy added 263,000 jobs in November, marking another strong month of job growth. The unemployment rate remained at 3.7%, close to a 50-year low, while average hourly earnings jumped 0.6% from the prior month and 5.1% from the year-ago month. Higher wages will add to higher inflation. Meanwhile, business activity jumped the most since March 2021 in November, suggesting that the largest part of the economy remains resilient. ISM’s gauge of services rose to 56.5 last month from 54.4 in October (read: 4 Sector ETFs to Play Upbeat November Jobs Data).

Further, consumer sentiment improved in early December, with the University of Michigan's Consumer Confidence Index rising to 59.1 from 56.8 in November. All these data underscore inflationary pressures that support Federal Reserve interest-rate increases into 2023.

The Fed has raised interest rates six times this year, including four bumper 0.75-point increases, bringing the rate to between 3.75% and 4%. Fed Chair Jerome Powell is expected to raise interest rates by a half-percentage point in a meeting this week.

ETFs in Focus

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 143 stocks in its basket, with each accounting for no more than 2.4% of the assets.

SPDR S&P Regional Banking ETF has AUM of $2.8 billion and charges 35 bps in annual fees. It trades in an average daily volume of 7.2 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.   

Vanguard Energy ETF (VDE - Free Report)

Vanguard Energy ETF is one of the popular choices in the energy space, having accumulated $8.2 billion in its asset base. It provides exposure to a basket of 107 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index.

Vanguard Energy ETF sees a good volume of about 733,000 shares and charges 10 bps in annual fees. VDE has a Zacks ETF Rank #1 with a High risk outlook.

Vanguard Real Estate ETF (VNQ - Free Report)

Vanguard Real Estate ETF follows the MSCI US Investable Market Real Estate 25/50 Index and holds 166 stocks in its basket. Specialized REITs take the largest share at 37.4%, while residential REITs, retail REITs and industrial REITs round off the next three with double-digit exposure each. The expense ratio comes in at 0.12%.

Vanguard Real Estate ETF is the most popular and liquid ETF, with an AUM of $35 billion and an average daily volume of 5.4 million shares a day. VNQ has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETFs to Benefit From Dovish Fed Signals).

Utilities Select Sector SPDR (XLU - Free Report)

With an AUM of $16.4 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. XLU follows the Utilities Select Sector Index, holding 30 stocks in its basket. Electric utilities take the top spot among sectors at 65.5%, closely followed by multi utilities (28.3%).

Utilities Select Sector SPDR charges 10 bps of annual fees and sees a heavy volume of 13.8 million shares, on average. XLU has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Vanguard Value ETF (VTV - Free Report)

Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 341 stocks in its basket, with key holdings in healthcare, financials, industrials and consumer staples.

Vanguard Value ETF has AUM of $99.6 billion and charges 4 bps in annual fees. The product trades in volume of 3.1 million shares per day on average and has a Zacks ETF Rank #1 with a Medium risk outlook.

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